Saga Partners, a fundamental, long-term, value investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be seen here. A net return of 24.5% was recorded by the fund for the Q4 of 2020, outperforming its S&P 500 benchmark that delivered a 12.1% return. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Saga Partners, in their Q4 2020 Investor Letter, said that their Dropbox, Inc. (NASDAQ: DBX) position was sold during the quarter. Dropbox, Inc. is a designer and developer of document management software, that currently has a $10 billion market cap. For the past 3 months, DBX delivered a 28.06% return and settled at $24.37 per share at the closing of February 18th.
Here is what Saga Partners has to say about Dropbox, Inc. in their Q4 2020 investor letter:
"If I were to label certain decisions mistakes, Dropbox would fall in that category. Fortunately, this “mistake” did not incur a material loss to the Portfolio. However, just because an outcome was not unfavorable does not mean it was not a mistake.
The Portfolio first purchased Dropbox in 2019. My thesis originally surrounded the idea that Dropbox was the winning independent file/content sharing and collaboration platform that could potentially aggregate the increasing number of third-party work applications. This would create a neutral hub/platform for knowledge workers to manage their content and workflows. Dropbox had a strong track record and what I believed to be an advantageous position with its 600 million registered userbase.
I thought an independent/neutral platform that could integrate the best third-party workflow applications would provide a better user experience than a bundled platform with less desired applications and therefore be able to drive attractive economics long-term. There were early signs that this might come to fruition when Dropbox launched their desktop “smart workspace” application. However, as COVID spread, one would think that Dropbox was favorably positioned to take advantage of the surge in remote working. While Dropbox did see an uplift in demand, what caught me by surprise was the more significant surge in usage of Microsoft Teams, arguably Dropbox’s primary competitor in the enterprise space.
In 2017, Microsoft bundled its collaborative business software into Teams, making it the primary communication platform for its enterprise clients. What I originally viewed as a disadvantage, a bundled product that had applications customers desired less or worse integrations with third-party applications, ended up being an advantage. Its key advantage is it natively integrates with Word, PowerPoint and Microsoft’s other apps. For businesses already subscribed to Microsoft 365 Business, Teams is a free add-on instead of a separate bill. Microsoft does not break out its Teams revenue or paying userbase, but it has certainly seen strong growth since the onset of COVID.
Dropbox’s desktop application that seamlessly integrates with the other most demanded third-party business applications may provide a better user experience, but it appears to not be “good enough” to break away from the Microsoft Teams bundle. Dropbox does benefit from a sticky userbase and will likely continue to grow paid users and upsell existing paid users, driving consistent cash flows and modest growth. However, I determined that Dropbox’s long-term outlook is likely not as attractive as I originally anticipated as the strength of Microsoft’s bundle became clearer post-COVID. Perhaps Dropbox will follow a similar path as Slack and be an acquisition target, though that is not an investment thesis I want to rely on. Dropbox may still have a bright future, but as in any investing decision, when compared to other opportunities available at the time, I made the decision to reallocate to what I believed to be more attractive opportunities."
Last month, we published an article about the 15 Biggest Biggest VC Companies in the World and Dropbox, Inc. (NASDAQ: DBX) made it in the list. GDRX delivered a 9.82% return YTD.
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