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Drop The Box


Image source:  jakkapant turasen / Shutterstock.com

What's going on?

Dropbox reported better-than-expected second-quarter results and a brighter-than-anticipated forecast on Thursday, but Friday was a cloudy day for the cloud-based file storage and sharing company – its stock dropped by 10%.

What does this mean?

Dropbox had a 20% rise in paying customers to thank for its revenue and profit exceeding expectations – each of whom spent 5% more than the same time last year, on average.

But it wasn’t all good news: Dropbox’s chief operating officer will leave next month – and shares in the company that some investors were expected to hold on to until September at the earliest might hit the market later this month.

Why should I care?

For markets: It’s a Dropbox share soap opera.

When a company goes public (as Dropbox did in March), some investors consent to a “lock-up” on their stock – in essence, agreeing not to sell any shares for a period (usually six months) in order to smooth the transition from private to public. When Dropbox’s lock-up expires, the supply of its shares will increase while the demand for them won’t necessarily follow – putting downward pressure on the stock price. There may be “locked-up” investors waiting in the wings to sell Dropbox’s stock (perhaps to lock-in some profit – the stock’s up some 20% since its debut), and those footloose and fancy-free investors (i.e. not part of the lock-up) who sold on Friday might be trying to get out before selling becomes mainstream.

The bigger picture: US stocks may look relatively cheap again.

Companies’ quarterly results largely beating estimates is helping the US stock market flirt with highs once again. Taken together with strong economic growth in the US, analysts may raise their forecasts for companies’ earnings this year. When comparing stock values to annual profit (like in a price-to-earnings ratio), rising earnings may help stocks look a bit cheaper (as their price will be divided by a higher number). This may make them more attractive to investors, even as share prices rise.

Originally posted as part of the Finimize daily email.

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