Dropbox is effectively a “pure play” company in an industry which is becoming increasingly commoditized to the point of near-zero returns at the extreme. Margin expansion – as high as 1,500 bps per year as recently as FY17 – has also skidded to a virtual halt.
Increasingly Low Value-Added Industry: In the decade since Dropbox was one of the first to market with retail cloud storage in the late 2000s, industry behemoths like Google, Microsoft, and Apple have begun to offer cheap or free storage plans as part of broader cloud software solutions, causing Dropbox’s paid user growth to begin to approach single-digit levels. Spruce Point believes that its new normal of accelerated churn, increased capex, and rising customer acquisition costs will come to bear on results as soon as the next few quarters. Dropbox is a melting ice cube, and management’s last-ditch turnaround attempt is poised to disappoint lofty analyst expectations. Some investors take solace in Dropbox’s seemingly healthy cash flow, but Spruce Point believes that its FCF margin is misunderstood by the Street by as much as 2x. We have collected unique data showing that its late FY19 decision to raise prices after creating a more “business-friendly” platform – dubbed the “New Dropbox” – has enraged some of its core individual/SMB user base, and has given customers new reason to consider switching. Meanwhile, management’s recent attempt to reaccelerate growth appears to be falling flat. Spruce Point finds overwhelming evidence that the story has changed: Dropbox is a decelerating business in an increasingly low value-added space, with little network effects or barriers to entry. 
Dropboxs (“DBX” or “the Company”) was once seen – and is still seen by most investors – as the quintessential Silicon Valley software unicorn: a fast-growing, highly cash-generative SaaS company with a sticky customer base and a long runway for upsells.
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