Dropbox

We will discontinue analyst coverage of Dropbox on or about Sept. 25. 

We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Our $21 fair value estimate implies an enterprise value equal to 2.5 times our 2026 sales estimate.

In our opinion, the primary drivers of the company’s value are the growth of the total addressable market and Dropbox’s ability to penetrate that market. Dropbox’s TAM comprises both file sync and share and AI-powered universal search. To remain competitive in the commoditized FSS space, Dropbox has dropped its prices below those of the tech giants (Microsoft and Google), which illustrates its lack of pricing power compared with companies with scale and distributional advantages. We measure the file sync and share market at $11.5 billion today, and we expect a low 2% annual growth rate to $14.1 billion by 2034. We measure the AI-powered universal search market to be approximately $8 billion today, but growing quickly. We think it can reach five times the current size by 2034. Given these growth profiles, we expect AI search to become an increasingly important driver, accounting for a third of revenue by 2034. That said, we are bearish on Dropbox’s ability to retain customers and increase average revenue per user when sized up against viable alternatives from Microsoft and Google.

Paying users stand at approximately 18 million, but we expect the firm to struggle with adoption given a smaller salesforce following the 2024 layoffs and a return-focused information technology spending outlook. There is a clear correlation between revenue and paying users. When regressing the latter on the former, our revenue projection implies that paying users have roughly peaked, and we expect users to compress toward 17.5 million in 2034, which aligns with our expectations that Dash will have difficulty in penetrating enterprises. We believe the company will experience a 0.5% average annual revenue decline between 2026 and 2030 due to intense competition from scaled competitors who have cost advantages and the secular push toward application consolidation. We gain additional comfort for this conservative outlook due to Dropbox’s failure to attract a larger portion of customer wallets, exemplified by negative inflation-adjusted average revenue per user.

As a software application, Dropbox enjoys some operating leverage on every major cost line item. The firm’s highest costs, like salaries, do not increase one-for-one with revenue increases, but we do note that some of this fixed cost leverage will diminish with recent layoffs. Still, we like the push toward a leaner business model as it should be a tailwind for profitability, which is exhibited in our projected adjusted operating margin increasing from 27% in 2025 to 29% in 2035.

Dropbox owns approximately 90% of its server infrastructure rather than relying exclusively on third parties like competitor Box. While there is a variable component with bandwidth costs which limits operating leverage, we like Dropbox’s ownership of data centers because it creates a more stable expense structure. But we are pessimistic that Dropbox will greatly benefit from the lower marginal cost of adding users because we do not expect much user growth. We like that Dropbox is deactivating inactive accounts since this should reduce data center costs and free up storage resources, which supports our projection for cost of revenue as a percentage of net revenue to decrease from 20% to 19% by 2035.

The other large expense line items are research and development and sales and marketing, driven by ongoing innovation efforts and the higher cost of developing and marketing Dash to enterprise users. We expect Dropbox to continue to utilize low-cost locations like Poland, but we also expect heavy investment in the Dash artificial intelligence search product. As such, we expect R&D as a percentage of revenue to remain flat around 29% of revenue over the next 10 years. Also, we do not expect compression in sales and marketing as a percentage of revenue due to the longer sales process associated with hiring a sales team and pitching Dash to enterprise users.

Overall, we appreciate Dropbox’s attempt to transition from FSS and content management to AI-powered universal search and improve free cash flow generation, but we are skeptical that the company’s AI-powered push will threaten the appeal of alternatives from tech giants like Google and Microsoft. We believe it's more likely than not that Dropbox’s days of rapid growth are a remnant of the past.

We believe that Dropbox has no moat.

If Dropbox had a competitive advantage, it would most likely have been built on switching costs. With software-as-a-service companies, there are various ways to measure switching costs, ranging from gross revenue retention to net revenue retention, average revenue per user, customer lifetime value, and customer acquisition costs.

A moatworthy software company with high switching costs should benefit from high GRR, implying low customer losses. If customer upsells and seat expansion are working, then NRR should be high. Since going public in 2015, Dropbox’s GRR rates have been stuck in the mid-80% range, and NRRs are in the low-90% area, all while customer churn has remained in the mid-teens. This compares unfavorably with Box’s 96% GRR, 107% NRR, and 4% churn averaged between 2017 and fiscal 2025. According to SaaS Capital, the median GRRs across a comparable set of 1,500 SaaS companies is 91% (approximately 6% higher than Dropbox), the median NRR is 102% (10% higher than Dropbox), and the median churn rate is 9% (approximately 6% lower than Dropbox).

This benchmarking confirms our belief that a considerable number of individual consumers and SMBs, which make up the lion’s share of Dropbox’s customers, are price-sensitive and view Dropbox as an auxiliary service rather than mission-critical software. This perception manifests in customers ending subscriptions when times are tough, which is then compounded by a common desire to consolidate applications.

We also look at inflation-adjusted ARPU to further argue against a switching-cost moat. Since 2020, nominal ARPU has increased at a low 1.5% annual rate. When accounting for inflation, we see real ARPU has decreased at a 2.3% rate. This troubling trend shows that Dropbox is failing to gain more of a customer’s wallet over time, indicating that there is a lack of stickiness to the platform and the value proposition of Dropbox’s offering is diminishing amid competition from larger tech players like Google and Microsoft, which are more deeply embedded in customer workflows.

On top of this, Dropbox has seen tepid paid user growth, averaging 2% over the past three years, with a paid user conversion rate below 3%. Taken together with poor retention metrics, Dropbox has a hard time attracting new users and lacks the pricing power we usually see in moaty software companies.

In markets without switching costs, competition often intensifies, and CAC rises. Companies engage in aggressive marketing or provide incentives to stand out, increasing CAC. With Dropbox deploying a predominantly self-service-based model and freemium-to-upgrade funnel, we would expect a lower CAC than Box, which requires more "handholding" to entice enterprise clients. Sales and marketing at Dropbox run about 10 percentage points lower as a proportion of revenue than Box. However, we observe that Dropbox’s CAC is rapidly increasing despite the self-service model, indicative that Dropbox is struggling to acquire and retain customers. We don’t believe this is due to the Dash for Business offering, which will undoubtedly need higher marketing support, because this AI feature was recently announced.

Instead, we believe the CAC increase is due to a lack of switching costs among add-on platforms (like Dropbox and Box) and intense competition from large players (like Google and Microsoft), which manifests in spending more money to retain customers. On top of this, Microsoft and Google have highly effective migration tools—meaning they can easily poach customers away from Dropbox and guarantee that the customer’s data will be transferred securely and safely. The preponderance of such migration offerings and the number of well-capitalized, viable storage alternatives effectively illustrates a lack of switching costs.

We also believe that any arguments for intangible assets or network effects as moat sources are dubious at best. For intangibles, FSS is commoditized, and Dropbox must undercut competitors' storage pricing to remain viable. For the Dash for Business and the new total addressable market within AI-powered universal search, we like the ability to search structured and unstructured data rapidly, but it is far too early to conclude that this creates a durable competitive advantage since the product was just announced toward the end of 2024.

An indirect network effect could be argued with respect to increasing API calls and application integrations, since these would indicate increasing interoperability with third-party applications and a stronger value proposition. With increased API calls, users are interacting with the platform more. With more integrations, collaboration is becoming more streamlined, making Dropbox a more appealing platform. Unfortunately for Dropbox, the number of developers who have created integrations and the number of API calls has not increased since 2021.

Overall, we conclude that Dropbox lacks switching costs, intangible assets, or network effects as moat sources. While we are intrigued by Dash for Business, we believe it will face stiff competition from deeper-pocketed, tech-savvy players and is more likely than not to fail in terms of creating a durable competitive advantage.

Dash, Dropbox’s AI-powered universal search tool, is an intriguing product for a world that is rife with unstructured data. The new Dash product should lift average revenue per user and retention rates.

Dropbox’s recent layoffs create a leaner structure and a profitability tailwind as it reallocates resources to future green shoots like AI-powered search.

Dropbox has a large user base, with over 700 million registered accounts, which provides fertile ground for upsells and cross-sells.

The AI-powered universal search tool, Dash, is still nascent and faces robust competition from tech giants like Google and Microsoft, which have distribution and scale advantages over Dropbox.

Dropbox's gross revenue retention and net revenue retention remain below those of other subscription software firms, while churn remains elevated.

Dropbox is subject to a tough macro environment in which businesses are constantly looking to consolidate applications to reduce costs and infrastructure complexity.