Dropbox Shares Fall 5% Despite Beat and Raise Quarter

Shares of Dropbox (DBX) took a 5% tumble on November 6 even though the company’s Q3 performance and Q4 guidance exceeded expectations across the board.

In Q3, the online file storage company generated revenue of $487.4 million, beating the $483.6 million consensus estimate and reflecting a 14% year-over-year increase. EPS of $0.26 easily beat the $0.19 forecast. Additionally, operating margin reached an all-time high of 23% in the quarter, compared to 13.1% in the prior-year quarter.

As for ARPU, it came in at $128.03, up from $126.88 in the previous quarter. The number of paying users hit 15.25 million, versus 14 million in the year-ago period.

Management told investors that internally, it has adopted a virtual-first work model, with this move expected to result in a one-time GAAP impairment charge of $400-450 million for Dropbox in the coming quarters.

As a result of the COVID-19 pandemic, Dropbox has updated its product lineup to capitalize on the distributed work trend, with the company seeing the move to distributed work as analogous to the shift to mobile and adoption of the cloud.

“In Q3, we saw momentum across the business with strong operating income, profitability, and free cash flow… Our margin expansion demonstrates the strength of our business model and execution against our long-term targets. We believe the opportunity to redesign work has never been bigger, and now, as a Virtual First company, we’ll truly live our mission as we build better products for distributed teams,” Dropbox Co-founder and CEO Drew Houston stated.

Going forward into Q4, Dropbox now expects sales of between $497-499 million, versus the Street’s $494.1 million call, and an operating margin of 22-22.5%. For 2020, management is projecting revenue of between $1.907-1.909 billion, up from the previous guidance of $1.891-1.901 billion, and free cash flow of $480-490 million. (See Dropbox stock analysis on TipRanks)

Covering the stock for Monness, five-star analyst Brian White reiterated a Hold rating after the print was released. He noted that despite its “modest valuation” and the “ramp of new Dropbox innovations,” “the company is still searching for a compelling narrative that captures the imagination of the investment community.”

The rest of the Street is more optimistic, with DBX’s Strong Buy analyst consensus breaking down into 4 Buys and 1 Hold. With the average analyst price target clocking in at $28.50, the upside potential lands at 49%.