Dropbox (DBX) – We See It 30% Lower By October

Who doesn’t find Dropbox a really convenient and useful tool?

  • Free storage based on the cloud
  • Access to ALL your files from any device….anywhere

I use it and I love it. But it is a commodity service.

Amazon provides a similar service, as does Google and many others.

It’s unclear what Dropbox has that offers differentiation or a competitive advantage. That question can be debated and features may change with time, in the meantime, the facts are below. And it does not paint a good outlook if you are bullish.

  • Dropbox’ revenue growth has declined in the last two years
  • The business model depends on current free user base becoming paying subscribers
  • There is significant competition in the cloud storage space – Google offers 15 GB of free storage with each email account, iCloud offers 5GB for free and 50GB for $.99/mo, Amazon offers 5GB free and 100GB for $11.99/yr and 1TB for $59.99 (Dropbox is $99.99/yr for 1TB)
  • Current float is 35 million, 326 million will unlock in 6 months from IPO date (nearly 10 times current float – this is significant)

It will be a challenge for DBX to grow at high rates unless new products or efficiencies are introduced

Technicals Point To $20 Per Share Too

The technical backdrop for DBX also suggests the prices are heading lower towards $20 as well. The key question is how long might it take to drop there?

The chart below suggests within a week or so….aggressive and optimistic….but not impossible.

The $20 target was derived using a basic ‘projection’ using the length of Wave (i) that is then projected from the completion of Wave (ii). Typically Wave (iii) will travel 161.8% the length of Wave (1)….or in this case $20.

How We Are Trading This Scenario

Given that the ‘lock-up’ of the 326 million shares will come due in late September, it is reasonable to expect that to weigh on the stock price. Will the market discount ahead of time? That is a reasonable conclusion to draw.

To take a more pragmatic approach, we are suggesting you consider Oct 19 30 Puts which last traded at $5.70

Recently Closed Trades

  • SPY Put Spread +21.7%
  • QQQ Call Spread +27.1%
  • Short 10-year notes +1.23%
  • SPY Put Spread +4.58%

Have a question for me? Just ask.

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