Dropbox Stock Is Worthy of Some of My Own Capital Risk

There are some high profile names going to the tape with quarterly results tonight. We could talk about the Walt Disney Company (DIS) , but we did that in this morning's note. Activision Blizzard (ATVI) could be interesting after Morgan Stanley slashed their price target for one of my semiconductor names, Nvidia (NVDA)  , based on gaming. Skyworks (SWKS) also reports tonight, but I think I will focus on a name that I am already long, that I think I still like, but has been a drag on my P/L. I think we're going to talk Dropbox (DBX) .

What is Dropbox?

Quickly, for those who have always wondered, but were afraid to ask... The firm is a provider of cloud storage services. What that includes is the filing, organization, sharing and securing of data that would otherwise require space on user hard drives. The service also allows for a business to present their work to business partners or customers in the form of a website.

Does the firm have enemies? Well, it does compete directly against the big kids on the cloud block. Amazon (AMZN) , Alphabet (GOOGL) , and Microsoft (MSFT) all provide cloud storage services. Does Dropbox have friends? Well, the firm does have alliances, and not just the recently announced strategic partnership with Zoom Video. DBX has partnerships that might help in reaching unrealized markets with both Hewlett Packard Enterprise (HPE) , and Adobe (ADBE) .

What Do We Look For?

The industry is expecting Q3 EPS of $0.06 on revenue of roughly $352.6 million. Whispers seem to be running a couple of cents to the high side of consensus view per share, while revenue growth at this level would represent a 23% increase from a year ago. Money is nice. In fact it's really what this is all about, but cloud names are priced for growth. This firm runs with a great cash position. Debt is under control. From that perspective, the name is healthy. That said, with a forward looking multiple that appears very expensive, the firm must be able to talk about growth tonight.

This name went public in March. At the time of the IPO, the firm stated a total user base of 500 million accounts (that's huge). Mind you, many of these accounts are of the entry level and unpaid variety. When the firm reported Q2 results in August, they also announced an increase in the paid subscriber category of 400K, bringing the total to 11.9 million paid subscriptions. That comes to 2.38% of the total user base if my math is correct. That's a lot of dry powder, gang. That's why this name is worthy of some of my own capital risk.

Dropbox needs to show regular quarterly increases not just for that metric (I'd settle for another 400K today. I'd like more), but also for average revenue per user. That line currently stands at $116.66. An increase of another five bucks there would satisfy me as a medium to longer-term investor.

The firm does not need to compete at the same level as those bigger cloud names that I have already mentioned, this name just needs to draw enough market share to make those bigger names wonder if they should move somehow on the name. The market will take care of the rest.

The first thing I want you aware of is that the firm's lockup period expired on August 23rd. Hence the weakness there on higher volume that came just before the broad market shake down in October. The chart does present a "sort of" double bottom that might have scattered those playing with weaker hands.

For the rest of you, Relative Strength, Money Flow, and the daily MACD are all in seriously improved condition with the 12 day EMA crossing over the 26 day EMA, and giving chase to that nine day EMA (now in positive territory).

Tell Ya What I'm Gonna Do

I come in long the equity. I purchased my initial tranche just a smidge above $30. Through the magic of just a little dollar cost averaging and net basis manipulation through the sale of out of the money puts at various prices, I have worked my net basis down to $27.06. I was looking even better than that at one point, but had to buy back some puts at a loss along the way. This took the basis back up to where it is now, when all is factored in.

After the good citizens who actually read my stuff get a chance to act, but before the closing bell today, I am very likely to...

-Sell $29 January calls (last: $1.05)... and

-Sell $22 January puts (last: $1.00)

What I am referring to here is called a "Strangle". It's a very simple options strategy that leaves the entire trade in the possible position of expiring worthless as opposed to a "Straddle", where one side is sure to expire worth something. My intent here is to get my net basis down below the last sale for the equity prior to the release. The revenue derived from this premium capture will amount to $2.05 per strangle, thus if I do this correctly leaving me with a net basis of $25.01.

Obviously, I will be at risk of having to add at $22 in February. The stock has rebounded there twice. I will also be at risk of having to take a profit at $29, which by the way... is already my target price.

(Disney, Amazon, Alphabet and Microsoft are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells DIS, AMZN, GOOGL or MSFT? Learn more now.)

At the time of publication, Stephen Guilfoyle was Long DBX, AMZN, NVDA, MDFT, ADBE equity, Short ADBE, NVDA puts.

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