Cloud computing has been a winning theme for many investors, but the same cannot be said for business models that lean on the cloud to provide data storage solutions for consumers and other enterprises. It's a cutthroat niche, and Dropbox (NASDAQ:DBX), which competes in it, is currently a broken IPO after going public at $21 in 2018.

In a year during which stocks generally rose, Dropbox has been going the other way. Shares of the out-of-favor cloud storage giant peaked in the low $40s a few months after last year's debut, but now are trading in the mid-teens and hit another all-time low on Thursday. It has been a rough ride for shareholders, but the current situation could be a buying opportunity.

Two employees having a conversation as one looks over dual monitors running Dropbox.

Image source: Dropbox.

Getting the drop on Dropbox

Trying to nail down the reasons for the stock's 62% slide from its peak isn't as easy as you might expect. Many debutantes flop as a result of failing to live up to expectations -- fueling the narrative that their IPOs were exit strategies for the venture capitalists and founders -- but that hasn't been the case at all when it comes to Dropbox. It has blasted through Wall Street's profit targets with ease during each of its first six quarters as a public company. 

Quarter EPS Estimate EPS Actual Surprise
Q2 2018 $0.07 $0.11 57%
Q3 2018 $0.06 $0.11 83%
Q4 2018 $0.08 $0.10 25%
Q1 2019 $0.06 $0.10 67%
Q2 2019 $0.08 $0.10 25%
Q3 2019 $0.11 $0.13 18%

EPS = earnings per share. Data source: Yahoo! Finance. 

How a company fares against the Street's forecasts is never a complete portrait, though, as sometimes, those earnings beats are the result of a company offering overly cautious forecasts that it can later clear with ease. That hasn't typically been the case with Dropbox, and if anything, analysts' consensus earnings estimates for the current quarter as well as 2020 have been inching higher in recent months. Dropbox has boosted its guidance in back-to-back reports.

One knock on Dropbox is that its revenue growth has been slowing -- its top-line gains did decelerate for eight consecutive quarters through the second quarter of this year. However, it surprised some analysts by coming through with a slight acceleration in the third quarter.

Things obviously aren't perfect at Dropbox. A company doesn't trade at all-time lows by accident. Among the issues are the recent resignation of two key executives: Its chief customer officer and chief technology officer will leave the company early next month. The bigger pressure point is that Dropbox went public at a pretty lofty valuation. One big problem with investing in IPOs is that the hype can exceed the reality, which often leads to underwriters settling on ridiculous starting points to accommodate heavy demand. Dropbox was richly priced out of the gate.

The fact that the stock is now trading below that IPO level even after its top- and bottom-line gains means that its valuation has moved more into alignment with reality, but despite that, Dropbox is not a screaming bargain yet. Looking out to next year with Wall Street projections inching higher, the stock trades at nearly 30 times forward earnings and 4 times revenue. Those metrics do not make it a cheap stock, but from here, Dropbox has a good chance to turn its share price trajectory around if it can continue its recent growth acceleration. If it at least holds steady on its revenue gain rate and demonstrates the scalability of its model by coming through with reasonable margin expansions, this could be the bottom right here. 

Dropbox has all the ingredients in place to bounce back in 2020. Unlike the situation for its ballyhooed debut in spring 2018, the company's reality seems stronger than the hype around it right now.