Analyst: Dropbox Earnings Plunge is a "Gift"

Traders are punishing DBX after earnings, but bullish analysts remain loyal

by Elizabeth Harrow

Published on Aug 10, 2018 at 9:26 AM

It's shaping up to be a rough session for Dropbox Inc (NASDAQ:DBX), with the stock sliding 9% in pre-market action. The company last night topped second-quarter earnings expectations, driven by a bigger-than-forecast increase in paying subscribers. However, Dropbox also announced the departure of Chief Operating Officer Dennis Woodside, and advanced its lock-up expiration date to Aug. 23 from Sept. 7 -- a move that will allow pre-initial public offering (IPO) shareholders to sell stock earlier than expected.

Analysts have responded positively to DBX's quarterly results. RBC upgraded the stock to "outperform" and raised its price target to $36 from $34, while Jefferies and Canaccord Genuity upped their respective price targets to $37 and $38. In a note to clients, Canaccord called the after-hours decline in DBX an "overreaction," and said, "this pullback is a gift for our key customers who buy stocks based on fundamentals and are happy to buy things on sale."

From a broader perspective, brokerage firms are overwhelmingly positive on DBX. The stock boasts nine "strong buy" ratings, compared to just two "holds" and one "strong sell."

Through last night's close at $34.43, Dropbox stock had rallied an impressive 28.6% from its all-time closing low of $26.77 -- a bottom put in place less than two weeks ago, on July 31. The equity's pre-market sell-off is set to erase yesterday's outsized gains, but DBX's 20-day moving average -- which recently served as resistance -- could potentially switch roles to provide a floor.

It looks as though DBX earnings speculators were right on the stock's direction, given that puts were the options of choice in recent weeks. During the past 10 sessions, traders have bought to open 1.22 puts for every call on Dropbox, according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX).

However, the magnitude of today's decline might still be a disappointment. By last night's close, Trade-Alert data shows that DBX options were pricing in a directional move of 18.1%.

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