Dropbox (NASDAQ:DBX), a provider of online file storage, has seen its stock remain in the doldrums since its decline after Q2 earnings were announced in August. Investors hoping for a turnaround when the company's Q3 results were reported on Nov. 7 remained out of luck; the stock continued its lackluster run. The stock currently hovers around $18.80 a share, below its March 2018 IPO price of $21.

This is despite achieving 19% year-over-year revenue growth in Q3, beating its guidance, and raising its full-year revenue outlook for the second consecutive quarter. Are investors missing an opportunity here? Or is Dropbox stock to be avoided? To answer that, let's examine the factors driving Dropbox's current stock price.

Dropbox logo.

Image Source: Dropbox.com.

What makes investors reticent

Dropbox launched in 2007. At the time, cloud computing was still nascent, and its main competitor was Box (NYSE:BOX). Dropbox differentiated itself from Box by focusing on mass-market cloud storage while Box concentrated on helping businesses.

Since then, much larger competitors like Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google Drive have emerged. Battling for market share with heavy hitters like Google Drive is a risky proposition.

Even more worrisome is how Dropbox's revenue growth has changed over time. While Dropbox has enjoyed double-digit revenue increases for each of the past four years, that growth has been slowing. In 2017, the company made $1.1 billion, up 31% from the year prior. Its 2018 haul of nearly $1.4 billion was about a 26% increase. Its 2019 full-year guidance, in the range of $1.657 billion to $1.659 billion, represents a further year-over-year decline in growth rate to about 19%.

In addition, Dropbox has failed to turn a profit under generally accepted accounting principles (GAAP). In Q3, its net loss was $17 million, nearly triple the $5.8 million lost in the same period last year.

Sure, many companies operating in the tech sector are valued more on potential than on profit. But in Dropbox's case, this could be working against the business as it battles competitors and a decelerating revenue growth rate, an indicator that its potential is waning. It makes sense that investors are shying away from the stock.

What are the positives for Dropbox?

While concerns exist, there are several positives about the company. Thanks to its mass-market approach and early entry into the space, Dropbox has amassed more than 600 million registered users. Of those, less than 3% pay for the service.

Even with such a small percentage of paying customers, Dropbox's revenue is approaching $2 billion. So it makes sense that part of Dropbox's growth strategy is to convert registered users of its free product to paying customers as well as to upsell existing paying clients.

To drive customers to higher payment tiers, Dropbox invested in product improvements this year. It now offers several new features, such as the ability for teams to collaborate by adding comments to a shared file or to sign and notarize documents online.

Dropbox has also achieved consistent profitability on a non-GAAP basis. The company's non-GAAP earnings per share (EPS) have beaten analyst expectations every quarter as a public company, including Q3, when the non-GAAP EPS was $0.13 compared to analyst estimates of $0.11.

This is worth noting because Dropbox incurred one-time expenses in 2019 related to moving into new headquarters as well as to its $230 million acquisition of HelloSign, which specializes in technology that allows for digitally signing documents. Once these costs are behind it, Dropbox's bottom line should improve.

What's next?

Dropbox has made strides toward unlocking more revenue from its substantial user base. The company had 14 million paying customers in Q3, up from 12.3 million in the same period last year. Its Q3 average revenue per user (ARPU) rose to $123.15 from $118.60 in Q3 2018, an indicator that customers are paying more for Dropbox services. It's also encouraging to see the company's total registered user base rise in Q3 by about 20% from 500 million in Q2.

However, the company's lack of a differentiated product offering against formidable competition remains a key concern. It's still too early to assess the company's new product features. Should the number of paying customers and ARPU continue to increase, it will be a good indicator that the product changes are satisfying its customer base. And this would bode well for the company's long-term prospects.