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What to Expect from Dropbox's (DBX) Q2 Earnings Report

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Shares of Dropbox Inc. (DBX - Free Report) shed as much as 2.8% before closing sideways during regular hours Wednesday, a day before the cloud services firm releases its latest quarterly earnings report.

Dropbox shares have gained 9.5% since its late-March IPO, but saw plenty of volatility along the way. Dropbox shares appreciated as much as 47.4% by mid-June, when it reached a price of $42 per share. But by the end of July the story was different, as DBX plunged to -6% when put against its IPO price. In the last week, shares have regained about 17% in what has been its latest bullish run.

Another Tech Privacy Scare?

In terms of why Dropbox shares took such a big hit in July, there isn’t much news to look back on. The company did come under fire after the publishing of a Harvard Business Review article that detailed researchers using Dropbox to study the virtual interactions of scientists at various institutions. The article had incorrectly stated that the data which some researchers used was not anonymized.

The piece generated concerns about Dropbox’s privacy policy, which has been a hot-button topic ever since firms like Facebook (FB - Free Report) and Alphabet (GOOGL - Free Report) came under fire for leaving users vulnerable. However, both Dropbox and the article would go on to clarify that the data was in fact anonymized, easing those concerns.

More recently, analysts are bullish on Dropbox’s future. Last week, Jeffries upgraded DBX from Hold to Buy, believing the firm to be undervalued. Analysts at D.A. Davidson hold a similar sentiment, arguing on Tuesday that DBX’s push to “grandfather” existing users into its new premium services package will translate to growth in average revenue per user, a key metric for the firm.

Wednesday’s movement reflects investor apathy heading into Thursday’s report. But what should we expect from its soon-to-be-reported quarter? Let’s take a closer look.

Dropbox, Inc. Price, Consensus and EPS Surprise

Dropbox, Inc. Price, Consensus and EPS Surprise | Dropbox, Inc. Quote

Earnings Outlook

Dropbox will release its Q2 fiscal 2018 results after the market closes on Thursday. Here’s what analysts are expecting, according to our Zacks Consensus Estimates:

Earnings: DBX is projected to report earnings of $0.06 per share, which would mark a big shift from last quarter’s ten-cent beat of $2.08 in net loss per share.

Estimate Revisions: The firm hasn’t seen any recent earnings estimate revisions for the current quarter, or any other upcoming period. However, the Zacks Consensus Estimate for this quarter is a cent higher than it was 90 days ago. Moreover, the current fiscal year consensus EPS estimate of $0.28 is also four cents higher than the previous projection.

Revenue: Consensus estimates have DBX’s Q2 revenue pegged at $330.3 million. Investors should note that DBX’s full-year consensus estimate of $1.35 billion would represent 22.2% in year-over-year growth.

Valuation

DBX is trading at 90.1x forward 12-month earnings heading into today’s report. This represents a significant premium compared to the “Internet Services” industry’s average of about 19.9x, but is still far “cheaper” than the stock has been in recent months.

Since its IPO, DBX has traded as high as 193x and as low as 77.1x. Its 52-week median earnings multiple is 94.8x.

Bottom Line

Given the amount of competition in the cloud computing space from players like Box (BOX - Free Report) , Alphabet’s Google Drive, and Amazon (AMZN - Free Report) , Dropbox has a lot of work ahead of it. But if it can continue its two-year streak of adding nearly 500 thousand paid users per quarter, it could make for a compelling investment opportunity.  

DBX shares have seen mixed performance this year, so many investors may be more inclined to sitting this one out and watching for any exciting news. Analyst revision activity for the quarter has been muted, but DBX has a Zacks Earnings ESP (Expected Surprise Prediction) of -11.1%.

A positive Earnings ESP paired with a Zacks Rank #3 (Hold) or better ranking helps us feel confident about the potential for an earnings beat. In fact, our 10-year backtest has revealed that this methodology has accurately produced a positive surprise 70% of the time.

Given the stock’s current Zacks Rank of #3 (Hold), this Earnings ESP value doesn’t leave us particularly confident about Dropbox’s chances at beating estimates going into Wednesday afternoon’s report. Still, with 500 million users, and solid growth prospects, Dropbox remains a company worth keeping an eye on.  

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