AI Investing

Dropbox Inc., DBX reported earnings on Friday, February 20, 2020, not to be confused with BOX which reports earnings on February 26^th, 2020, with revenues and stronger cash flows, We started covering Dropbox Inc., in the 3^rd quarter of 2019 because it’s in a space that we believe will see very good growth over the next five years. The stock is still slightly undervalued based on its intrinsic value by about ten percent with a fair value stock price of $24.71.

The 4^th quarter numbers were pretty good putting the company on track for stronger growth going forward. The company reported revenues of $443.5M but expected $446.00M a 0.60 percent increase. The company grew earnings to .16 per share versus expected earnings of .14 per share, up 13.19%. Based on my understanding of how the company was growing revenues and the context of the earnings call, this quarter was significant because of the quality of the earnings growth.

The company is looking at Non-GAAP and GAAP forward guidance of 18% – 19% and 13% -14% respectively. We believe the company’s earnings growth is sustainable based on the expectation of higher gross and operating margins and is not sacrificing growth by de-focusing on average user growth generated through subscription revenues.

I think the company has a firmer grasp on its business plan, and we should see stronger, sustainable growth in the future. Is the stock a buy? We think so. However, be mindful. This stock is not a Wall Street darling like Facebook, Amazon, Netflix or Google so don’t expect huge volatility in the stock price or huge stock swings. It’s a slow burner. We own stock in Dropbox.

Disclosure: I am/we are long Dropbox. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it . I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

By Rick Walter
02/14/20
4:00 PM

Cloud storage and solution companies are the next up and coming hot area for investment. Companies like Amazon and Microsoft are competing mightily for this business and winning. However, there are other smaller or mid-size players in the field that could also be huge winners in this growing, lucrative market.

I started following Arista Networks in the 3^rd quarter of last year. Since that time the stock has fluctuated from a high of $249.49 on Sept 12, 2019, to a low of $185.30 on November 1, 2019. The stock since then has ground back up to the $240 range on February 12, 2020, only to fall back to the $218 price levels after earning announcements on February 13, 2020.

The numbers weren’t bad but they weren’t that good either. I listened in on the company’s webcast yesterday and I was not impressed with the presentation. The overall guidance for the upcoming first and second quarters for this year was very confusing. I couldn’t tell if the company was forecasting breakeven for the upcoming quarters, a slight loss, or a huge loss. Based on the previous 3^rd quarter webcast last year, company officials reiterated that one of their major customers- (a cloud titan) who’s responsible for a good portion of their revenues, had not made a commitment or firm decision to continue to use their products and services going forward. Company officials said that they had to adjust to this uncertainty going forward. Fair enough.

However, in the fourth quarter, nothing was mentioned of this pending doom to the company’s revenue base and bottom-line. Instead, the company focused on collective doom stemming from the cloud industry itself. Huh! Analyst after analyst threw a multitude of questions that would or could shed light on the growth issues but were unable to pierce the cryptic responses from company officials.

This company initially fit our criteria for innovative product and services, consistent earnings per share growth and stable management with the ability to identify the risks in the markets and make prudent decisions to adjust to those risks. However, this company fails miserably in the management section. Just listen in on their earnings webcast and you will get an idea of what I am talking about. Is the stock a buy? We are uncertain, because no one could get a straight answer during the earnings call. Namely, “why is the company experiencing slower growth than most companies in one of the hottest growth markets today?”

We are holding off purchasing any more shares in this company until we can get better and clearer guidance. If management can’t give you a clear answer, then why should we or any other investor invest in the company?

We own shares of stock in Arista Networks.