Yet Another Value Podcast - Elliot Turner on Dropbox $DBX

Episode Date: August 4, 2020

An interview with Elliot Turner of RGA (http://rgaia.com). We discuss why Elliot missed Shopify, how the lessons from Shopify helped him invest in Roku, and a little on ANGI and Twitter. Then, we dive deep into his thesis on Dropbox (DBX).

All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have my friend Elliot Turner. Elliot is a managing director at RGA. So, Elliot, how are you doing? Doing well. How are you? Good morning. Thank you for having me on. Hey, no, thanks for being here. Just some quick background. So Ellie and I actually met a few months ago. I didn't really know Elliot, but I asked a mutual friend about a stock. And he said, hey, you know, the person you should really ask is Elliot. He is a, he's a, he's a, he's a, he's a, I believe the quote they said was, he's a moneymaker. He's super sharp. You should talk to him. So we started talking a few months ago. We've talked about a bunch of different stocks. And I've really enjoyed the conversation. So happy to have you on here and happy to just, you know, be talking with you. Absolutely. And I've enjoyed your blog for so long. So it was great to get to know one another personally and start hearing your perspective directly. As much as I enjoy the blog, having these conversations is like exponentially more helpful. And it's cool to see you have a podcast because you bring a lot of value to the interview side of things. And I'm happy to be one of the early guests.

I appreciate that, Matt. So why don't you start for our listeners who don't know a lot about you, maybe give us a little bit of your background and how you got into investing. Yeah. So I was introduced to investing at a pretty early age. I was lucky to have a fourth grade teacher, Mrs. Burdick, who had every year enrolled her class into the Newsday Stock Market game on Long Island. And she would give us the Berkshire annual report. And she'd tell us, us who Warren Buffett is. Meanwhile, we'd all sit in the class and throw like darts at any random name that seemed like a high flyer. For context, I was in the fourth grade in like 1992, I want to say. So this was, you know, after the 90s recession, the very beginning of what

was, well, I guess right before the really wild phase of the bull market kicked off. So I got my exposure pretty early and was lucky to be given a little slug of money from family to play around with during the dot-com days. And obviously piled into everything as crazy as you can imagine with no actual knowledge of what I was doing, but just I caught the bug. I had a love for it. I always knew I would have something to do with investing. I didn't necessarily know. from that day I wanted to be a professional investor per se. But, you know, it's a kind of skill that no matter what you do, it's something that you're going to end up doing. I went to law school after college. I graduated during a recession. And I still knew I wanted something to do with

investing, but didn't know exactly where it was going to be. I was working in sports. I didn't love working in sports. And, you know, early in the crisis, I had an opportunity in the financial crisis, had an opportunity to work at a trading desk. And that's where I really, you know, made the pivot and made it a professional endeavor. The people I worked for were great. They gave me the opportunity to start building my own strategy using some of their capital to risk as opposed to mine. It was nice that they took that sort of chance on me. And I started writing letters to people that asked for insights on what was happening in the market on ideas. And I really was pushed to kind of go on my own and create a firm out of it. It was never a specific path, was no pedigree

built toward it. And so over time, I think the one constant is I've constantly tried to make myself better and be better tomorrow than I was yesterday. Very messy story, but I feel like I tell it a little differently every time. No, that's great. You know, I think the three things I love, try to make yourself better than today than you were yesterday and better tomorrow. Like, I think that's the key to investing. I think that's the key to pretty much any profession. But the nice thing with investing is like, you know, you tend to peak when 40s, 50s, I think that's when people tend to peak as investors versus a lot of other things, you know, I think specifically sports. You tend to peak early 20s, mid-20s. So we've got a long time ahead of us and it's nice that we can keep

compounding. You know, speaking of sports, it's funny. You started in sports and went to investing. I think you see a lot of investors, they started investing and they want to go, buy the Mets, buy the, you know, they switch over. And then fourth grade, 1992, getting introduced to the Berkshire report. That teacher was, uh, she was early. I hope she bought some Berkshire then because she would, uh, she'd be retiring pretty wealthy. Yeah, I'm pretty confident she was buying Berkshire like every step of the way. She had been doing that game for us for at least a decade by then. Like, her reputation was about introducing students to different concepts. And you know, this is just a regular public school on Long Island. It's not like I went to a school where like investing was part

of the DNA of the parents there, you know, most of the parents were like professionals, not hedge fund managers where it was. Yep. So it was like interesting and it was like, I feel really lucky to have been exposed to that at such a young age. I also feel really lucky that when the stakes weren't all that high, I experienced a dot-com bubble and did some of the worst things one could possibly imagine like owning CMGI and ICGE and, you know, really some of these flyers and got that out of my system very early. You know, I think that helped. That's awesome. That's awesome. So that's great background. And so why don't we talk a little bit about, fast forward to present day and talk about, you know,

I think from Twitter and our discussions, I've got a good idea. But what type investments do you kind of find yourself most attracted to? And where do you think your biggest edge in kind of analytical capabilities is? Yeah, so that's a really good question. I focus mostly on growth at a reasonable price. So I want to find companies where there is some structural growth tailwind, where the valuation's reasonable. And then the other side of valuation, I want to think about a company that I could fairly value and triangulate using our pretty standard tool sets. I want something like asymmetric in there, something where if the situation goes right, it's not just an okay return.

It's a great one. And part of that is I know that if I have a portfolio of these kinds of companies, there will be somewhere, you know, the base case return just doesn't pan out. But the ones that work will more than make up for a few mistakes along the way. So it kind of integrates into portfolio management, the stock selection philosophy. And, you know, I think my greatest tool set, it's really drawing abstract connections from diverse sources of information. So, you know, it's one of the harder things to articulate, but I think one of the strengths I've had is just really broad reading as a generalist and being able to hone in and simplify

situations to distill their essence while, you know, contextualizing the whole situation. Your sound may have cut out. Good now. Okay, great. Oh, man, that's a disaster. This is obviously the second podcast. And the first one was a little grainy. So I'm using these headsets. I'm getting a new mic tomorrow, but, you know, I was excited to talk to you. So I wanted to get this going. One of the things you tweeted recently that really resonated with me was you tweeted your biggest miss ever was Shopify, which I think is like a 30 bagger over the past couple years

or something. I mean, it's up massively. It's done phenomenally, I think better than even the Bulls thought. But the lessons you learned from Shopify really helped you with a very successful investment into Roku. So I was wondering if you could dive a little into that, you know, why did you miss Shopify? What lessons did you learn from that and how you applied that to Roku? Yeah, no, that's a great question. So Shopify didn't always trade at these gaudy sales multiples.

Not long after Shopify IPOed in early 2016, when the market had a pretty big slump, you know, I guess that that week period of market performance really started in the summer of 2015. So in early 2016, Shopify was trading at about five times sales, still growing at a very healthy clip. And I was building my model for Shopify, and I felt pretty good about it. And one of the things I typically do is just try to see where I shake up versus a consensus and try to figure out which lever in their revenue model in particular is most important. And if I have a divergent or a variant perception and how the consensus is thinking about the stock. And when I was working on Shopify, my numbers. Like, what's hard is you have a pretty good read on how many new stores are opening on Shopify,

but what you don't have a good read on is how much GMV per store they're able to generate. And at that time, it was especially, you look over quarters and you look over years, it was pretty variable. And, you know, it was very hard to get a grasp on what was and wasn't driving it. And so my numbers were shaking out to be way above the streets. It's like, you know, 30% higher just one year out on revenue. And I'm like, what the hell is going on here? Like, what am I doing?

So I start tweaking with some of the revenue drivers, trying to bring these numbers down. And, you know, I keep doing that. And then I look against the street and I'm still like way ahead. And at the time, you know, I was kind of still evolving as an investor. And I had been far more focused on valuation first and then analyzing. qualitative. I've kind of since reversed those processes and my Shopify experience was part of it. Yep. But, you know, I really felt that it was me who was failing as an analyst and I had to be wrong. And I questioned myself repeatedly, like, what am I doing wrong? Where am I model am I wrong?

What mistake am I making? Like, I can't have conviction on this stock because my numbers just don't seem within the realm of reality. And, you know, you fast forward now, it's easy to look at it with hindsight, but not only were my numbers much closer than the street, but they too were way too light versus what actually happened. Yep. And so, you know, fast forward to the end of 2018, the end of 2018, the market went straight down pretty much every day I woke up in December, futures were off, at least another

one or two percent. And Roku was one of those stocks that was just caught in a vortex. Like every day, Roku was down another 5%. And the company was growing really well. You looked at estimates. They were actually rising during that whole period. And there was nothing specific to Roku at the time. It was just, you know, every growth stock was getting pummeled, but this one especially so.

And it was trading like on what I thought was three times the one year out platform revenues. And, you know, obviously there's a broader story about how people were still stuck on Roku as a hardware company. Yep. But specific to this, like my numbers, you know, I was looking for a billion dollar in platform revenue just a couple years out. And the street was like at 700 million, maybe even less at the time.

And so here I was, again, in a situation where my numbers were way high. And you have like three to four levers that play into figuring out. where revenues are going to be. And, you know, I didn't necessarily know whether it would be in the hours viewed per household, the number of households, or the ARPU, which one of these levers I was most off on. But I was way ahead of the street. And the street, you know, like the drivers seemed to make sense. Like, it seemed like what I was looking at was in the base case realm of things. So, you know, because of Shopify, with Shopify, I stayed away. In Roku's case, That led me down an even further hunt to build my conviction on the qualitative side,

that they were in the right place, that they were doing the right things, that the business was built to succeed, and that the revenues were going to be there. And it led to me not only taking a position, but taking a decently larger position and having a lot more conviction, despite the fact that, you know, I think the day I bought the stock, it took the first five days owning it, I was down 20 percent. and I hadn't even experienced one green day in the stock. And inevitably, I think it's my single best IRA investment I've ever made as an adult outside of the dot-com crisis when I was throwing shit against the wall.

No, that's a great story. And I think Roku is six-baggers since them. Am I remembering that correctly? It's close. From where I started, it's about a five-backer. So not terrible. You know, I spent a lot of time in the media space, and I remember late 2018, early 2019, I had a ton of people pinging me.

Hey, take a look at Roku. And I, exactly what you said, I was stuck in, this is a low margin hardware company. Like, it's not what I'm looking for. And, you know, I didn't break out of that mindset. And, you know, to my detriment, to my investor's detriment, but that's often where I find a lot of opportunity lies, right? Like, people think of it as a low margin business. Cable's been one of my best investment.

People thought of, hey, video, cord cutting, all this stuff. And it's no, that's a big headline and maybe it results of revenue fluctuation, but it doesn't really matter. Like broadband was the story with that. And for you, Roku, they've got this great installed base. The story is the platform going forward. Exactly right. And people are still stuck on the hardware story. I've spoken to a lot of bears in the last like year and a half.

I think some of it was started by the stock went parabolic and people have an attraction to shorting those kinds of things. You know, and it's like a valuation short dressed up in other ways. but I hear so much about like, oh, TCL is going to ask for a rev share. TCL is too big a partner. They're going to have some leverage over Roku. And, you know, look, Android TV is now, TCL now launched Android TV. But it's like, at the end of the day, there's no one who says, I'm going to buy a TCL TV and ends up with a Roku. It's like, people go to the store or search online, what's the best Roku TV?

And TCL is the answer. So, like, Roku could work with another partner and equip them to the exact same degree that TCL is today. There's a lot of behind-the-scenes action there. And people are still so caught up on the hardware. It's really about having built this better platform. That's much simpler that has an interface that, like, a five-year-old and an 80-year-old alike could figure out in three minutes. And I agree with all of that. And I don't want to spend too much time on Roku here.

But just one quick question, you know, obviously there's been a lot of discussion on Roku with Peacock and HBO Max kind of a lot of I don't think they've come to an agreement yet. There's been lots of discussion around that. That's a space I'm very interested in. I've thought about it, but I don't think I've come to any great conclusions. I wonder, do you have any thoughts there or any takes there? Yeah, I mean, my thoughts are somewhat facetious, right? Because you look at the strategy of these two and launching streaming platforms without having a presence on, it's not just Roku. They're not on the fire stick either. Yep. How do you want to launch a widespread platform for streaming that can't get you on the TVs that most people have for streaming? And you can only have a company. I think it shows that like when Disney Plus launched, they went all out on Roku.

They paid for the button on new TVs. They did a lot of audience building advertising on Roku. who, like, they knew that these platforms were key, but, you know, at the end of the day, um, you, you have Peacock who's effectively owned by Comcast, whose primary business is distribution, not content, right? And then you have HBO who's within now AT&T, who again, their primary, uh, business is like connectivity and distribution, not content. I think that's the mistake these guys are making. They're coming at it from the wrong angle. They don't understand the essence of the strategy that they need to drive for stream.

today. And I think it shows in Disney's quick success. No, look, I think that's exactly right. You know, I think back to Netflix. A lot of people said, oh, Netflix is going to go, you know, Netflix got built onto the Comcast platform. And a lot of people were confused by this. Hey, why are they giving Comcast to take? And Netflix strategy has been, we will go and we will, we let our users get on however we can, right? Every distributor will pretty much willing to partner with them. And it's a little surprising. Like, content is a game of scale, especially in ad-supported one like Peacock. the biggest scale

out there is getting on Roku and it is a little surprising they haven't got that one of the thing I wanted to talk about from that Roku and Shopify thing you mentioned a lot Hey I

The sound again All right Oh man I can't wait for this new mic to come in If it happens again, I'll switch to the laptop, which is a little grainy. But you mentioned a couple times, hey, I build a model and one year out, I was 30% ahead of street. Or even today, I don't think the street gets Roku estimates, right. You know, personally, when I do stuff, I tend not to look at the street side because I find it gets too biased.

I get too focused on kind of shorter term revenue versus longer term growth drivers and value. Do you spend a lot of time looking at street models, reading cell side reports, or how do you think about that? I, you know, I've ebbed and flowed over time, but I think I've gotten more comfortable with how I do it. One thing is the street gets pretty good access to companies and they get some color on margins in particular that, like, I can't get even in IR conversation. So I think it's pretty important to have an understanding and see where I shake out versus street. And then the other side of it is I've now, like since the Shopify thing, those situations where I could find and distill exactly where I see. stand out versus the street and why I have a different perspective. So like on PayPal, it was engagement. On Roku, it's now evolved from account growth to hours viewed per household. Like,

if I could find exactly which line, I have a variant perception and I could explain it qualitatively and it's like a really simple explanation, those are the kind of situations where I want to place my largest bets. Yep. So that's kind of how I've used it most. For first step, is, you know, contextualizing my numbers, making sure that, you know, they have some sort of at least anchor and if no, if they're too far off, you know, distilling where, why, and how. No, that's great. That's great. So I want to spend some time talking about actually Dropbox, which is an idea you know I've talked about a lot offline. But before we get there, you know, I think a lot of your investments, I think a lot of people on Twitter will humorously know

you for your recent posts and stuff on Twitter, Twitter, Roku, Dropbox, you know, a lot of these are growthier value names. So I just want to talk about, like, you know, when you look at the market today, do you think that the market is just underestimating a lot of these growthier, growthier platform names that aren't like the top tier, like a Facebook, a Shopify? Is that kind of what you're seen? Or is there anything else in the market you're seeing that, like, kind of presents overall opportunities or surprises you? Yeah, I mean, I think in my, In my year-end commentary, especially last year, it's been a little different this year with the dispersion from the COVID situation, but I think the markets had a little bit of distaste

for companies who are growing well but not otherworldly who have cash flow generative capabilities already today. And so if you're a shiny new object and you're able to put up gaudy growth numbers, you'll get far more rewarded than if you're a few years farther out the growth curve and things are a little different. And I think a good contrast is like you look at Slack versus Dropbox today. And there's a great narrative about how awesome Slack is. But in a lot of ways, I think they're pretty similar. Slack's revenue scale today is where Dropbox was four and a half years ago. Meanwhile, Slack trades for double the enterprise value. And so great. I mean, Slack might keep growing.

It's not to say, I think, anything bad about them per se. But, you know, as you grow, your Tam starts budding against others, Tam, right? There's this point where, like, you know, my Tam is your Tam and we're fighting a little more. And you see that with Slack and Microsoft teams. Like Dropbox, when they were growing at that stage, they were not necessarily a niche and they had an opportunity to capture the world. Like when you're young and you're growing fast, the world seems, you know, your oyster. But then you hit this point of maturity where like your Tam is budding against everyone else's who's in adjacent spaces and your growth inherently slows. And I think the difference in treatment from the market of the young with wide open Tam versus the old with, you know, kind of more restrained but nice growth rates is pretty stark these days.

And I think there's just a little more investing behind narrative after COVID than there was before too. So I, you know, those are kind of the areas I've been hunting last year we put on, you know, our commentary is about like we bought Twitter, Dropbox, Angie, home services, those kinds of companies that were actually spitting off cash, but, you know, growing slower than some other similarly situated businesses. I didn't, I didn't realize you were in Angie. IAC's been a long time position. And I've actually, I absolutely love Angie. you know, I think they're the market, they wanted quick 30% margins with 30% growth, like they wanted it two years after. And it's taken some time, but I think the company there has done all the right things. You know, I would say like the similar theme to me for Dropbox,

Twitter, and Angie, and I don't want to put words in your mouth, but these are platforms. And what they're doing is the market's been disappointed in the monetization to one extent or another. But what you're saying is, hey, I look at these and the platform is actually starting to accelerate and it's not me thinking like oh right now it's a year out like they're doing all the right things and they'll be able to get that monetization a year out two years out is that putting too many words in your mouth or what do you think no i think that's pretty spot on you know these the users of these businesses are incredibly loyal to them and they have the runway an opportunity to like make some mistakes or hit some speed bumps along the way to monetization but they're

going to be able to keep experimenting and getting there and maximizing it. And then separately from that, each has like unique asset value, like strategic asset value that's irreplaceable who someone else might, you know, inevitably swoop in and pick up to capitalize for themselves. And each also has what I like to call like level up potential where, you know, like with Twitter right now they're struggling a little bit with the monetizations up. But they've got this massive user base that spends, hours and hours on the platform.

And, you know, the world news literally breaks on Twitter. And you think, like, they could level up in terms of, hey, what if they, you know, a lot of people are in substack. I'm on subjects now. What if they launch the substack product or something, right? Like, because they've got so many people in such a platform, there's all these different monetization opportunities. And some will work out.

A lot of them won't. But if one or two hit, it could be, you know, as Roku showed, you hit with the platform revenue and all of a sudden, it's huge margins, huge growth. Cash flow is just pouring in. So, yeah. That's exactly right. Right. So let's turn over to the idea I really want to talk to you about today. Let's talk Dropbox. I think most people are probably familiar with the product, but for the few who aren't, could you kind of give me a quick overview of Dropbox and maybe your elevator pitch on why you're invested in it? Yeah, I think one important point I'd make right away on the product is a lot of people still associate Dropbox with file sharing for all kinds of uses. Dropbox is different than that, though. It's basically 80% business.

Yep. Right. So they've really moved on from just being this like kind of app for connectivity that anyone was using in collaborative terms anywhere, like sending whatever pictures from the weekend to your friends to really robust workflows in small and mid-sized business in particular. And that's where Dropbox is best. It's not necessarily just dummy storage. There are real use cases that people are executing on every single day. And that's one of the problems in like defining Dropbox. Can you give an example of a use case that people, you know, might not be familiar with, hey, why do I need to use a Dropbox, especially as a small business versus I can just load something

to a Google Cloud or something? Yeah, for example, with my accountant at the end of the year, when I have all my, God, tons of paperwork to send and share in different ways. ways. They create one central Dropbox file that we both share that has a password and is just accessible by us, and I dump everything in it. And so it's just a document dump folder, but it's, you know, very secure. None of the stuff goes through email where there's an extra layer of vulnerability, and it all goes right to them. Another one might be like a small doctor's office that has four separate rooms. Formerly, you'd use like Windows Network. You'd have built a whole network in your office. You have an IT consultant who's, you know, setting everything up for you. Yep. Now with Dropbox,

you have all four of these computers that are effectively working as one with one backend server. It's seamless. It's really fast. You could take x-rays in one room and move to the next and have visibility of them on a screen, very simply. And when you think of the relative costs in the past, you were paying an IT consultant, you know, a couple thousand dollars a, you know, periodically. Maybe it's every other year to make sure your systems are up to date and you're buying licenses for software that cost decently more. Now you're paying like 125 bucks a year and you're getting everything you need. So, I mean, I could go on and on, but that's one of things that's really hard to define with Dropbox. You know, everyone who uses it has a slightly different use case. There's no one

answer that works really well. Another one that I'll throw out there that I really like is, is like if you Google, if you search for like the best way to use DocuSign and dump your files into even a Microsoft OneDrive account, Microsoft suggests that you use Dropbox with a simple app as the go-between. They created an auto template that automates everything. If you do the integration directly through DocuSign to send to OneDrive, it's like you, that's the first link. The second link is the Microsoft Automate link.

if you do the direct integration, it's like 50 steps and it's a pain in the butt. And instead, you could just go to the Microsoft site, click one button, download this and it's done. And it goes through Dropbox. So there are all these different kinds of workflows that I think are pretty important and impressive and no one answer for like why someone uses Dropbox versus something else. One that I've really been attracted to and tell me if you think I'm off on this, but you know, you mentioned an accountant to our lawyer. Like if they've got a lot of different small business clients and stuff, like having Dropbox is actually really good because, you know, some clients might be on Microsoft, some might be storing on Google Drive and stuff. If you're true, do you want to open a Microsoft through Google Drive all this? Or if you just use Dropbox, you can use one thing for all of your clients, which actually makes it a lot easier as particularly a small business or, you know, if you're a business that interacts with a lot of other businesses.

Using Dropbox is nice because it's platform agnostic, if that makes sense. Absolutely. It makes total sense. And that's true across all kinds of different sharing areas from, like, music. I just saw an example, Trey Anastasio from Fish talked about getting drums from Fishman through Dropbox to produce, to create music while he's, you know, in stay-at-home orders. Yep. These things are platform, being platform agnostic and being open to all integrations, as opposed to just some that are strategically important. I think just increases the amount of surface area that they have to capture customers from. Yep. So let me, one thing with Dropbox is, look, you say Dropbox, and it's file storing, and it's especially important when you're working from home and you don't have access to

your main network and everything, right? So one thing I've been a little surprised by not that I ever want stock price to dominate my view, but, you know, most of the companies, when I say, hey, they're a work from home beneficiary, their cloud, people are going to use them when they're working from home. their stocks are way up, you know, like I think of, we're talking over Zoom. I think of something like Zoom or Slack or anything. Dropbox stock has been, I think it's pretty, pretty much flat on the year. It might even be down. And that's despite the work from home beneficiary. They came out with Q4 earnings and they massively increased the long-term guidance and everything. And I don't

want to say like stock price, bro, right? But why do you think the market's missing this or why hasn't been a, you know, work from home beneficiary so far? Yeah, this has been especially weird, because, you know, they actually are up on the year, but not that much, like modestly more than the NASDAQ. I think it's like 20% year-to-date. But pretty much all of that was heading into the COVID period before, like, really anyone faced the specter of stay-from-home orders. Yep. They had reported a great Q4, and they changed their long-term margin structure guidance and provided this $1 billion, $2024 free cash flow target. And, you know, the stock was doing really well, and then it obviously got pummeled in COVID.

And in I think it was early, it was late May or early June when they reported Q1, they went right back to that high level and they've gone nowhere since. Yep. They've received absolutely no benefit as a stay at home play. Interestingly, just in the past week, you had one analyst and Jeffries who came back off the, they had downgraded them late last year before the update of margin guidance. They came back bullish this week. They upgraded and they're like, yeah, this looks like a true beneficiary. They analyzed all the data on site visits and new enterprise accounts. And, you know, they said things look very good.

And then two days later, Bank of America, who's been byrated on this, downgrades them and says, you know, we just don't have enough visibility to tap the funnel conversion. So we don't know if they're going to get the benefit. It's like they haven't gotten the benefit anyway. No one's giving them the benefit. And, you know, the stock's really just stagnating. I think it's partly because of what I was saying before, there's just no runaway growth narrative. There's nothing there to really take anchor to. But I do think the company has a history of pretty conservative guidance, and they reaffirm their guidance last quarter and said basically they see good top of funnel activity and they want to wait before bumping it up.

So perhaps this upcoming earnings report on Thursday looks a little different. And, you know, I think there's still this, a lot of people are stuck on Dropboxes, you know, is it competing with free? Well, not exactly. Not in most of the use cases where they're actually used. And what does it look like? So they don't have like a natural investor base who could tie into like a cheap, screamingly cheap enough valuation or a, you know, runaway growth story.

So that's where I think Garp has like a big advantage. We could just sit here buy it and own for the IRA, right? Like if they hit that billion dollar free cash flow target in 2024, trade at a 4% free cash flow yield, which is like pretty normal for a structurally high margin, you know, fairly low churned business. You know, adding in the cash flows between now and then and their net cash, even after subtracting out capital leases, you get a mid-30s IRA. Yep. That sort of potential return is pretty nuts. And the hurdle's not, you know, they've got every target they put out there to the market, they've hit. I think, I think it was modest proposal who said like mid-30 IRA and the, you know,

the people who really focus on software as a service, and I guess SPACS at this point, would say, are you talking per week or per month? It's that, but, I mean, look, I agree with you. It's an interesting combination of it's a cheaper stock that should be benefiting from all these long-term tailwinds and should have some, and it has a lot of different optionality with it. And we'll talk about that in a second. But one of the thing I want to talk to you up, Dropbox is still led by, I believe it had

its co-founders and one of the co-founder left. Was it earlier this year, I think? But they're still led by kind of Drew, who is the co-founder, CEO, all of this type of stuff. How do you think about him? Because, you know, I think a lot of people when you brought Dropbox to them would say, hey, like, they did miss some opportunities. If you look at their stock price bro since IPO, it hasn't really done anything. Like, is this really a great founder CEO combo? How do you think about him?

Yeah, I think pretty highly of him. There's one big miss, which was he had actually wanted to buy Slack for about a billion dollars. I think it was like 2016-ish. When it was, you know, they were growing fast, but it was becoming clearer that their Tam was kind of hitting that, budding against others space. And, you know, he recognized the importance of Slack as an asset and his board turned him down. So no, no, no, no, we can't do this. Meanwhile, here they are with all this cash and, you know, like, look at what's happened since. Slack is worth twice them in enterprise value now.

I mean, he had an idea for where things were going. So I, you know, it's hard to fault him there. Maybe he needs a little better board, but like it does seem like he has a lot of conviction behind what's happening at Dropbox. So in the fall of last year, he bought another $10 million of stock on the open market. And, you know, they've actually spoken to how disappointed they are in the stock price. And alongside that updated margin outlook, they announced their first share repurchase, so $600 million plan, which, you know, on the,

on the morning of that announcement, that was effectively 10% of their market cap, it's a little less now. You know, I think that's a pretty strong statement. So as far as execution, I think everyone I've spoke to about and at Dropbox, they're a really strong engineering-led culture.

And people don't really think of them that way. Like they don't really understand the nature of Dropbox as having really good, you know, they think of it as dummy storage, but like the work they're doing in storage and building tool sets around that, they're investing pretty heavily at this. And that's both like a risk and an opportunity, right? It's an opportunity insofar as if these investments don't pan out,

you could cut some of the R&D and really optimize the business and get even more margin out of it. But if any of these initiatives, they're investing behind really, you know, either lower their cost relative to their competition in a sustainable way or create new kinds of products that people are willing to pay more for an ARPU or bring in new kinds of customers to the fray. there could be meaningful returns. And, you know, people don't necessarily want to pay up for that and understandably so. But all that R&D, effectively, you're getting for less than free in the price today because they could cut that out, worst case. And Dropbox has made a big move to kind of push and be at the centerpiece of everything you're doing with, everything you're doing with work, right? Like Dropbox paper, all this different stuff. They're trying to move from just file storage to they want to be a centerpiece for your workflow. Can you talk a little bit about that? And I think one of the things, I think about the most, and I've heard the most divergent views on is, is this the right

move for them or not? So can you talk a little bit about that piece of the thesis? Yeah, so new Dropbox, like I view pretty much as like an asymmetric opportunity on top of the core Dropbox. Like when I think about Dropbox, I think they have an extremely lucrative niche that people underappreciate. And, you know, the biggest problem is niches don't scale infinitely. They hit a wall of resistance at a certain point. So to break out of that, to get into new area. They have to bring the experience from the background in workflows where you don't really see or think about it to the front where people think about Dropbox every day. So, I mean, for myself, I actually use Dropbox paper to build all my company thesis. And it's because in

one Dropbox paper, like I'll have PDFs that are files, whether they be sell side research or, you know, other research reports sent to me. I do my interviews about companies through Google Docs, so I'll have those stashed there. It's a pretty good workflow for me. And then, you know, formerly I'd used Evernote to kind of pull this all together, but it's just so much easier and simpler in Dropbox paperwork, where it could have the links directly to my files, and I could write in it as a Microsoft Word type experience. And then I could tag my analyst and have them look at things, and, you know, it's a pretty good workflow. I don't know exactly how best to like quantify that opportunity it's out there i think one of the big things that they do well

especially when you talk about new drop box above and beyond paper um you could start a zoom call right from there you could uh type into slack right from there um so for certain types of enterprise like they've really confined themselves to s mb or not the market has confined them to smb but i think that gives them an angle to attack at enterprise a little better um you know it really remains to be seen. They haven't given us many data points, but I assume sometimes soon we'll learn a lot more about that. Excellent. Excellent. So let's start to Devil's Advocate Corner. So just a couple of things that top of mind for me, I think some of the reasons of the stock is week. So the most obvious one is there's this huge terminal value question with Dropbox, right? Like why isn't this long

term owned by not Dropbox itself, but why isn't the space owned by Amazon, Microsoft, Google, all the people we've talked out, right? Like, they can obviously offer storage for free. Microsoft in particular controls tons of your workflow. Why is Dropbox is Survivor versus these guys? Yeah. So, I mean, the first point I'd speak to is that you don't necessarily have to think too far out to terminal. So if you look at the LTV of their existing customer base and assume they never get another new customer again, and you assume churn rises, right? So right now they talk about net retention rate. It had been in 2017, they called it greater than 90%. Now they call it mid-90s.

So to me, I translate that to me, and it's been rising modestly from 2017 to now. But if you assume that net revenue retention drops to the mid-80s and they never get another new customer, that's what the market cap today is implying. So, you know, as far as terminal value, you don't necessarily need that much. But then the flip side of that is I do think there will be considerable terminal value, right? That's where I'm expecting to get a decent return above today's market cap from. And I think a lot of that boils down to what you mentioned about Dropbox being open and platform agnostic. So they really work just as easily for anyone, anywhere.

And the corollary of that is each of these companies that they're competing against has an imperative to keep people in their own ecosystem. so they're less willing to build certain integrations even across one another. So like Microsoft and Google don't necessarily work that great with one another. But for me, using Dropbox paper is a great way to kind of pull together the fact that I use both Microsoft and Google. So I think too many people think of a lot of these things as binary, where the opportunity is a little more nuanced than that. And then the other side of things, too, is, you know, with Microsoft and Google, a lot of people, people talk about these things being free and being bundled into broader products. But the fact of the matter is to get the more robust functionality you need for an S&B or to do

things like if you want a BAA certificate and claim HIPAA compliance, you're going to need to pay a minimum tier that's pretty comparable in price from one to another. And there they're really competing with functionality and they're competing with ease. Like, they've built everything for self-sign on, and they make getting the BAA a little simpler than Google and Microsoft, for example. So, you know, in all these kinds of use cases where you do have to pay more, they're not competing against free. And they're not competing against a bundle per se. And there's really, like, no true, you know, just because One Drive is Microsoft and you're paying your bill in one place, well, it's still pretty, there's no friction to using Dropbox instead. So I think people talk up too much of a friction.

And then the last important point is the price, right? The price is not that high. The average, the ARPOO across Dropbox is $125 per account. And when you're talking about creatives and collaborative work spaces, I mean, 125, maybe you're talking about like one hour of work pay. Really, if you look at the average salaries across these jobs, it's less than one hour. So if across a year, Dropbox makes it. you know, such that you save one hour somewhere, it's paid for itself. So, you know,

it would be a little different where there's a bigger ticket item. Perfect. Nope. That's great. That's great. You know, we mentioned earlier the financial targets. So Dropbox publishes financial targets, and you can correct me if I'm wrong on this. They publish financial targets in their investor day late 2019. They published some long-term investor targets. And I think even there, people are saying, oh, these margins are a lot higher than we thought. This growth rate is nice, all this sort of stuff. And then actually Q4 earnings come out and they actually increase all of their targets, right? And I think when you look at this, if they hit any of these targets or even come close to them, the stock's going to be a grand slam from here. Right. But I think there is a, the big question is,

can they hit these targets? Obviously, we've talked terminal value. You feel good there. But do you think they can hit these targets? Because a question I always have is, you know, these guys, Yelp, a lot of other people I've seen published these long-term targets. I haven't seen a lot of people actually hit their long-term targets. So what do you think the odds of them hitting them are? And why do you think that's realistic? Yeah, you know, in this case, I think the odds are pretty high. They've been a very conservative guideer from the, you know, beginning just about, I think every quarter they've guided to, they've beat. Yep. And by a decent amount. Not to say that that culturally is the right choice, right? I don't necessarily love that as a strategy, but it's there. So they don't like putting out

numbers that they don't view as achievable. A lot of the returns will come from the existing customer base and cash flow capabilities they already have. And then from there, you really only need modest growth in their customer account and their ARPU to hit the target. So, you know, I mean, obviously things could change from there, but inertia alone should carry them above and beyond those targets. I think one of the interesting questions about it all, so you mentioned the 2019 analyst day putting out financial targets, they actually increased their long-term margin guidance just six months after that in the February earnings report or five months after that. Yep. And so like one of the questions begs, like what changed from then till now? Like,

why do you come out there just a few months later and take what already were seemingly nice margin targets and go even higher a step beyond. One of the problems, I think, with their original margin targets is they weren't targets. It was a framework that expressed the tradeoff between revenue growth and margin. So it's like if our growth slows to the low teens, we'll have 2% higher margins than if our growth is in the midteens. If it's in the higher teens, if it's in the higher teams, we'll have 2% less. And that framework, I think, confused a lot of people because they're like, well, what growth should we think? Like, what are you striving to work? what's the end goal? So I think building that off of a billion dollar free cash flow target was

something a little more anchorable. And I think a lot of people, you know, the cash flow reporting for 2018 and 2019, and even into 2020 is confusing because of both, you know, duplicative headquarters as they're building out a new headquarters and paying for two buildings and where and how that flows. They did a nice extra report Excel file on the IR site that explains exactly how think about that. And because of hello sign or not. So like if you were screening just on cash flow, you might not have understood this to be as good. If you just, you know, in Bloomberg looked at price to free cash flow, you might be like, oh, well, you know, this doesn't look great. It's not a cash flow story. So that got people, I think, focused on the right thing. And then, you know,

a non-gap on Twitter, awesome account who talks about governance and pays hyperattention to any changes in incentive structures. I think he suggested that there is an activist who must have been working behind the scenes or more like a suggestivist and was telling them, you know, you guys can do better, should do better, like put this out there. And, and, you know, I think that change is meaningful. You know, he compared it to Intuit about a decade ago. When they similarly had this SMB business, people were fearing growth, but they, you know, emphatically told the market, we could make cash, we could earn cash, think about us this way. So I think that's very interesting. And yeah, you know, investors in the space really, like, you know, I don't know,

I follow a lot of VC type and growth investors on Twitter. No one really talks about cash, right? It's all about how fast they're growing, how great the company is, how great the founder and leaders are. Cash is a story just doesn't compete these days, but, you know, it's going to drive return one way or another. Yeah, no, I mean, just one of my favorite things about the analyst day and the targets was slide, I think it was like 26 or something, it was like, hey, every time we've guided, we've beat guidance, right? Like, we consistently beat our guidance. And then slide 27 was, here's our long-term framework. You know, this is what we're laying out. And the first thing everybody said was, oh, we don't believe that they're ever going to hit those long-term

guidance. It's like, well, maybe you're right or not, but it's just surprising so many people across the board said we're not going to hit it. And yeah, I think that's interesting. So we've talked a little bit about why they haven't, why the stock hasn't benefited from work from homes type stuff. But another angle that I have kind of question with Dropbox is, and I sent this to you, you know, if you remember five years ago, Salesforce has had their kind of internal M&A target list leaked and Dropbox wasn't on there. Pretty much every company that was close to Dropbox was on there, but Dropbox wasn't on there. And I've never really heard anyone talking like, hey, these guys would be a natural strategic target. It doesn't seem there's a lot

of M&A thesis around here, which is surprising for something with a huge user base that people interact with a lot. Like, why do you think there doesn't seem to be much strategic? strategic chatter around the company, if that makes sense. Yeah, no, one of the funny things about that Salesforce slide deck is Salesforce actually took a stake, I think two and a half percent of equity in Dropbox in the IPO. So they obviously were looking and thinking about it in some way. Like, what's the value to Salesforce of owning just that kind of stake?

To me, it suggests there's some level of intrigue there and there's some kind of fit they see, though there's something more. Either Drew, you know, says, you know, I don't want to sell. I want to build or something else to it. But yeah, you know, I do think part of the lack of conversation is about Drew controlling the voting share and having the opportunity to entrench himself and wanting to fulfill his vision.

But also there isn't necessarily a check-the-box fit need that you could easily identify, you know, Microsoft's got their own One Drive, Google has Drive, so neither of them necessarily come to mind. something like Slack it actually works damn well with so perhaps you know Slack might try to build their own effort there or maybe it's a little easier to use their expensive equity by some nice revenues and free cash flow and go that route but there anyone who's working toward workflow might want to have the flows that exist and can evolve on on Dropbox but yeah I don't

view M&A as a core part of my thesis like I'm not expecting so want to rapidly take the company over. I really just want, you know, the cash flows to grow. Yeah, no, that makes sense. So speaking of cash flow growing, I'm just going to turn to some of the questions I got online. I think this is a really good one. We talked a little bit about the new stuff they're doing, but how much the thesis is driven by kind of the core product versus all of the new stuff, hello sign, paper, and everything that they're trying to expand into. Yeah, so I like stripping it out where the thesis is based on the core product and anything that works there is a little extra. Hello sign is one that I think is extremely interesting, though, and I'm very excited

about. DocuSign was like a company that I know very well, and I missed, and I shouldn't have. Like, we use DocuSign ourselves, and I've seen the process for, you know, I've spoken with the people at TD who service us with the DocuSign account about the process of making that selection. And, you know, really, it's a beast in enterprise. Like DocuSign works with anyone. in a regulatory environment that needs it. And once they're there, they're never going to switch, right? So it's not like HelloSign is going to compete with DocuSign for TD Ameritrade down the line. What they are going to do, though, and, you know, it's taken a little longer than I hope to

build this out, but is there now. HelloSign is finally fully integrated into Dropbox workflows on Dropbox itself. So before you had to click out to the second app or tab, to get it. Now it's natively built in. And HelloSign, I think, is really a self-sign on version of DocuSign for SMBs. And it's a great way to compete, right? Longer term, when you think about like disruption theory, you want to come in on the low end of the market with minimum level of functionality. And by the way, they're well beyond minimum level. You want to come in with a lower price with self-sign on, easier operation, easier use. and inevitably go upwards. Like, it's going to be very hard for DocuSign to kind of build that minimum product. It's a lot harder to go downmarket for someone like DocuSign than for HelloSign to very long-term go up. And the fact that Dropbox knows and sees workflows and how people are using things behind the scenes, right?

They're very, very data-oriented in how they track uses across their API. they're able to understand which people they should push HelloSign as a product to, which kind of creatives, which kind of accountants or lawyers who are, you know, small like five to 10 person teams that aren't really candidates to work with DocuSign

would be right to sell HelloSign. So I'm really optimistic on that, but like I'm not pricing in anything into my model. I think hopefully, you know, if that works out, it'll bump my Arpoo expectations decently upward. Yeah. I think the interesting thing is like when I look at

Hello sign. I text you this. I was like, what's the difference between HelloSign and DocuSign? And the answer is, well, docky signs built into thousands of huge enterprise customers who are never going to leave. But, you know, HelloSign. There's no reason, especially with Dropbox's small business focus and funnel, there's no reason Hello Sign can't get into a bunch of these smaller businesses. And then over time, if a few of them grow into giant enterprises, like, hello sign can be a really interesting asset at that point. And there should be, you know, one of the great things about cable is if you get your video, actually, I don't know how much, how that is. But, you know, if you get multiple products from someone, it should reduce your churn. So if you get Dropbox plus HelloSign, it should also make that core Dropbox product a little stickier, too. That's a really strong point. I think that's very true here, you know, in software in particular. If you get someone to go from one use case to like 10, their odds of staying are much greater, right? The switching costs are much greater too. Yep. Yep. And they're using your product more. So hopefully your NPS is higher. You've got a little more pricing power. I've got a couple more questions, but I just want to, you know,

anything else on the Dropbox thesis, risk, anything that you feel like we hadn't touched on, that you would want kind of listeners or anyone who's looking at it to know, to be thinking about. Yeah, I mean, I think the one big thing they do, we didn't mention Box at all. And Box is really, you know, built around a Salesforce that caters to enterprise. And I think Dropbox has the potential to eat their lunch and steal a lot of customer share away from them. And that's another layer of competition that, you know, is interesting. And, you know, I think the University of Michigan sign on at the very end of last quarter is a really big one. And validates a lot of the different ways I've been thinking about Dropbox.

Like in the second paragraph of the Michigan statement on signing on Dropbox, they talk about, getting the BAA certificate and HIPAA compliance. And then in the third paragraph, they talk about how the move to Dropbox was actually steered by granular use cases amongst people at the university. So it was pushed upward, not downward. And I think one of the big differences in, you know,

if you research Dropbox by talking to IT consultants or in-house IT at big companies, you're going to get a really, really negative picture. But if you talk to people who actually use Dropbox, you'll get a very different picture. And one quote I got from an IT consultant, I think this is the most emphatic point I'd make on Dropbox. And maybe it's a little kind of disgusting,

but the literal quote was, Dropbox is like herpes, no matter what we do to sniff it out and shut it down. It keeps popping up across our organization. That's fantastic. Look, I've been obsessed with the cruise lines recently, and one of the customers is like, you know, I know I shouldn't be going on cruises in COVID, but it, you know, it's like a rat to cocaine. I'm like a rat to cocaine with cruises. And I was like, you know, that's the type of products you want to be buying. If the virality of your product can be compared to herpes or a rat addicted

to cocaine, like that's what you want to be on. So I just want to, the university mission, just to explicitly drive it home. That third paragraph you mentioned, what they're saying is, hey, our students and our faculty kept using Dropbox, right? They were using Dropbox. And if I remember correctly,

University of Michigan was a box customer. And because Dropbox was being used so much by the people, even though they were trying to push them to box, they decided to switch over to Dropbox. I just want to explicitly drive that home. Is that right? Exactly right.

Exactly right. And then, you know, we talked about M&A, I think both of us have discussed a little bit, if Dropbox and Box combined, I think there'd be pretty big synergies there. And I think that would probably be a pretty attractive end game. Probably the Dropbox team's takes over is what we both want. But I think that's an interesting kind of medium term end game with a lot of synergies there.

Absolutely. Yeah, they kind of are layered on top one another and how they compete in the market. So why not combine forces? Perfect, perfect. Cool. Look, this was great. Last question, you know, trying to get the podcast going, is there one company and or investor that you'd like to hear an interview from?

or an interview about? Oh, yeah. I mean, so many. I think modest proposal on IAC, especially with the recently consummated spin, would be fantastic, and I'd love to hear his thoughts. He's a great guy.

His interview on a best like the best was one of the best ones I've heard. So I'm going to try, and I love IAC. I'm very familiar with it, so I think we could have an interesting one. Another one you mentioned, I've got to get non-gap on here. He's one of my favorite thinkers and writers out there, so I'm going to try to do that.

But modest proposal on IAC is a great one. And hopefully with you recommending him, he will do it at some point. I'll get on it. Cool. Cool. All right. Well, hey, this has been great. Really appreciate you coming on.

I'll be sure to share the link and everything. And we'll, you know, just appreciate it. Thanks a lot, man. Awesome. Thank you so much for having me. Have a great day. You too.