The bad news is, DBX has had a lot of trouble selling its organic growth story to investors. In fact, despite those positive fundamental qualities, the stock is still trading nearly 20% below its IPO opening price. This begs the question, if DBX is outperforming expectations and executing well, why aren't stockholders being rewarded?
We believe it comes down to the company being perceived as having reached peak growth as well as potentially facing increased competitive pressures as it looks to penetrate the enterprise market. And, since the file sharing market seems somewhat commoditized with little distinguishing one from another, the belief that DBX will ultimately need to compete more on price to drive user growth. Indeed, its paying user growth rates have trailed off a bit over the past few quarters, going from 24% in 1Q19, to 20% in Q2, and finally 18% last quarter. Consequently, its revenue growth is also fading from the high 20% range to the mid-20% level.
Looking for a Spark
Which brings us to today's news. Before the open, DBX announced that it has acquired e-signature company HelloSign for $230 mln in cash. The acquisition will pit the company squarely against another recent IPO, DocuSign (DOCU), which also happens to be a business partner of DBX's.
Like DOCU and others, HelloSign allows users to sign and send a variety of documents electronically. Companies like Salesforce and Google can integrate its signature platform into their own software. On top of that, HelloSign also has tools for virtually faxing documents and managing the flow of paperwork.
From a strategic standpoint, the acquisition seems to be a good fit for DBX. Overall, though, DBX hasn't been an overly acquisitive company since going public. On that note, this amounts to the company's largest acquisition by a wide margin as its most notable purchase prior to HelloSign was its $100 mln deal for Cloudon in 2015.
Unfortunately, DBX did not provide any commentary regarding the financial implications of the transaction, such as whether it will be accretive or dilutive to earnings. What we do know, though, is HelloSign does has some substance to it with over 80,000 customers, including some prominent names like Lyft, Twitter, and Samsung. While it still lags far behind DOCU and its 454,000 customers, DBX is hoping that with its more than 500 mln registered users, it will eventually eclipse DOCU in the e-signature market.
Based on DOCU's commentary during its earnings call, we have a sense for how large this market is. Specifically, DOCU stated that it believes the eSignature total addressable market is around $25 bln. We can also get a sense of how quickly the market is growing since DOCU is a pure-play in the space. Over the past three quarters, its revenue growth has been firm in the mid-30% range, as opposed to DBX's mid-20% growth.
Of course, the increased digitization of conducting business has been a major catalyst for the industry. Many people have probably already used e-signature processes, perhaps in real estate or in financial transactions. Outside of DOCU, Adobe (ADBE), and HelloSign, there are dozens of other smaller companies that provide e-signature capabilities. In order to differentiate themselves, DOCU and HelloSign have expanded their technology so that it can be used more broadly across more use cases. For instance: contracts for sales, employment offers for human resources, supply chain management, and non-disclosure agreements for legal.
DBX Had E-signature Market in its Sights
Looking back, it doesn't come as much of a surprise that DBX made this acquisition. Based on its recent actions, it was clear that the company has been quite interested in the space. As we noted above, DBX had partnered up with DOCU through its Dropbox extensions. This enabled users to take documents that they stored on Dropbox and have them signed and sent with very little friction.
Also, this past November, DBX and HelloSign teamed up as DBX integrated HelloSign's e-signature platform, making it easy to request documents for signature or send out signed documents directly from Dropbox. Clearly, DBX has liked how that partnership has played out. With the acquisition, HelloSign will continue to operate independently for the time being, with DBX's focus now including driving more business to HelloSign.
While it’s difficult to truly evaluate the acquisition since we don't really have a handle on HelloSign's financials, this does look like a good fit for DBX. The e-signature market is highly competitive, but, with its 500 mln users, DBX just instantly became a major force in it. With its stock still languishing well below its IPO opening price, the acquisition could also ignite some much need enthusiasm for DBX.