Barclays: Here's why Apple should acquire Dropbox

AP / Business Insider

Apple's Tim Cook and Dropbox's Drew Houston.

• Apple CEO Tim Cook told analysts he wants to double the company's Services revenue by 2020.
• Barclays analyst Mark Moskowitz thinks Apple could do that by charging more people to use iCloud.
• The company could do that if it created "iCloud for Enterprise," a workplace product.
• And the easiest to create "iCloud for Enterprise" would be to acquire Dropbox, which Apple has previously considered.

Apple can repatriate $200 billion or more in overseas cash, thanks to the Trump Administration's new corporate tax cuts, and analysts are outdoing each other with theories on how CEO Tim Cook will invest that money. Citi and Goldman Sachs have already laid out competing theoretical acquisition scenarios.

Now Barclays analyst Mark Moskowitz and his team have dreamed up a new candidate: Apple could acquire Dropbox, the cloud storage company that's currently heading into an IPO.

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Moskowitz's theory leans on a statement made by Cook in the last earnings call, in January: "It was another very strong quarter for services with revenue of $8.5 billion, up 18% over last year, and we're on pace to achieve our goal of doubling our 2016 services revenue by 2020," Cook said (emphasis added).

"Services" is all the money Apple earns from App Store sales, iTunes, and other software products. A doubling of Services would imply annual revenues of about $50 billion per quarter in 2020.

That's easier said than done.

'iCloud for Enterprise'

Sales of the iPhone are in decline, and the growth of the "installed base" of existing Apple users is modest. Barclays expects it to grow at only 3% over the next few years. Within Apple's Services business, however, is one segment that obviously has room to grow faster than that: iCloud.

iCloud has about 850 million users, Moskowitz estimates, of which only 25% pay for data storage. The rest use iCloud's free services. Apple could goose that if it introduced "iCloud for Enterprise," a workplace version of iCloud that users could access on their iPhones or Macs. A huge number of iPhone users already use their personal iPhones for work. "iCloud for Enterprise" would simply give those users a safe place to store their work documents and communications. (Google already does something similar on Android, by allowing users to easily switch between their personal Gmail logins and their work logins.)

That's the dream, at least. Getting there is harder than it looks. Building an enterprise business - with all the necessary relationships with employers and enterprise software from other competing companies - takes years.

It's easier to acquire a company. Back in 2009, Apple founder Steve Jobs did make a failed attempt to acquire Dropbox. Drew Houston, Dropbox's founder, rebuffed the offer, and Jobs vowed to "kill" Dropbox by developing a competing product.

Unfortunately for Apple, that product was iCloud.

In the intervening years, Dropbox went on to become the best-designed, easiest to use, and most intuitive cloud service on the planet. iCloud, by contrast, is so confusing it is common for users to not know what they're storing in it.

'Acquiring an established company with existing enterprise relationship and product features may be a better approach than internal development'

Hence, Moskowitz argues, Dropbox ought to be an acquisition target:

"In our view, acquiring an established company with existing enterprise relationship and product features may be a better approach than internal development because of the following reasons: 1) New asset(s) could provide quicker access to well-established enterprise account relationship with thousands of paying organizations and millions of enterprise paying users immediately. 2) Competitive product suites in enterprise cloud storage beyond just file storage, but also in premium features like collaboration, third-party app integration, and content analytics. 3) Much higher pricing upside compared to currently consumer-focused iCloud. 4) Potentially significant synergies for Apple. Looking at the market landscape, relevant players in cloud-based storage/document management include Microsoft, Google, Dropbox, Box Inc, and OpenText, etc. While we don't believe Microsoft and Google will be giving up their OneDrive and G-Suite easily, companies such as Box Inc, Dropbox, and OpenText could provide some unique assets."

Dropbox was last valued as a private company at $10 billion. It has confidentially filed for an IPO that is expected to be worth much more than that. However, given Apple's vast foreign cash hoard, even if Dropbox was twice the price it would be well within Apple's range.

Being able to charge customers for a robust, flexible, workplace cloud storage/management solution would be one way to get Apple's average revenue per user from $3.90 per month (today) to $5.50 per month in 2020, the target it must reach in order to fulfil Cook's promise, according to Moskowitz.