Please ensure Javascript is enabled for purposes of website accessibility

Can Dropbox Maintain Its Post-Earnings Gains?

By Leo Sun - Mar 4, 2020 at 11:20AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The cloud storage service is still struggling to vault back over its IPO price.

Dropbox's (DBX 1.40%) stock recently popped after it posted strong fourth-quarter numbers. The cloud storage service's revenue rose 19% annually to $446 million, beating estimates by $2.7 million.

Its non-GAAP net profit grew 59% annually to $67.4 million, or $0.16 per share, which beat estimates by two cents. On a GAAP basis, which includes stock-based compensation and other one-time charges, its net loss narrowed from $9.5 million to $6.6 million.

Those growth rates looked solid, but Dropbox remained below its IPO price of $21 per share. So will Dropbox's post-earnings pop finally lead to sustainable gains?

A laptop accessing a cloud storage service.

Image source: Getty Images.

How does Dropbox make money?

Dropbox, like its rival Box (BOX 1.15%), offers cloud storage solutions to individuals and enterprise customers. Both companies offer users free accounts, and encourage them to upgrade to paid tiers for additional storage and management tools.

Dropbox's free tier offers individual users 2GB of cloud storage. Its $9.99 per month plan (billed annually) offers individuals 2TB of storage, and its $16.58 plan offers 3TB. It also offers variable business plans based on an organization's number of employees and storage needs.

Dropbox's main weakness is the competition. In addition to Box, it competes against similar services from Alphabet's Google, Microsoft, and Amazon. Those tech giants can all afford to bundle their free cloud storage services with other products. Nonetheless, Dropbox and Box remain popular with companies that don't want to tether themselves to Google, Microsoft, and Amazon's prisoner-taking ecosystems.

How fast is Dropbox growing?

Dropbox's annual recurring revenue rose 19% annually to $1.82 billion during the fourth quarter, indicating that its users were sticking with the service. Its number of paid users, average revenue per paying user (ARPPU), gross margin, and operating margin also improved sequentially and annually during the fourth quarter:


Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

YOY revenue growth






Paying users (millions)












Gross margin






Operating margin






YOY = Year-over-year. Non-GAAP margins. Source: Dropbox quarterly reports.

During the conference call, Dropbox CFO Ajay Vashee attributed its user growth to a "number of wins across a range of verticals including healthcare, government, finance and real estate." Vashee also noted that "one of the largest medical technology companies" signed on over 10,000 employees.

Dropbox ended the year with over 450,000 business teams and 600 million registered users, and expanded its service into a full-fledged "workspace" that integrates with Google Docs, Slack, and Zoom's video collaboration tools. That expansion locked in more customers, widened its moat, and gradually boosted its ARPPU.

A network of cloud computing connections.

Image source: Getty Images.

Dropbox expects its revenue to rise 17%-18% annually (or 18%-19% on a constant currency basis) in the first quarter. However, it expects its non-GAAP operating margin to dip sequentially to 13.5%-14% due to seasonal payroll taxes and year-end bonuses. It expects its full-year revenue to rise 14%-15%.

Wobbly profits and a baffling buyback plan

Dropbox is generating stable growth in revenue and users, but it remains unprofitable by GAAP measures, mainly due to its high stock-based compensation (SBC) expenses.

Its SBC expenses rose 30% annually to $69.3 million, or 15.5% of its total revenue, during the quarter. Dropbox's overwhelming dependence on stock bonuses is frustrating, since its free cash flow actually rose 83% annually to $161.3 million during the quarter.

Dropbox also authorized a new $600 million buyback plan, which equals about 7% of its market cap, to "underscore" management's confidence in its future. However, a large portion of that buyback will likely be used to offset the dilution from its stock bonuses.

It's generally unusual for an unprofitable, growth-oriented company to prioritize buybacks over investments in the core business. Dropbox might believe that launching a big buyback plan will attract the bulls and vault its stock above its IPO price again, but it would arguably be smarter to plow that cash back into its ecosystem via R&D investments or acquisitions.

Can Dropbox maintain its momentum?

Analysts expect Dropbox's revenue and non-GAAP earnings to rise 14% and 44%, respectively, this year. Those are high growth rates for a stock that trades at 27 times forward earnings. Dropbox generated over half of its revenue from the U.S. in 2019, and no other country accounted for over 10% of its top line. It's also blocked in mainland China, so it shouldn't be directly affected by the ongoing coronavirus crisis.

Those facts should limit Dropbox's downside at these levels, but it might need to make more aggressive acquisitions -- instead of treading water with buybacks -- to bring back the bulls.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dropbox Stock Quote
$22.47 (1.40%) $0.31
Microsoft Corporation Stock Quote
Microsoft Corporation
$266.15 (-0.02%) $0.06
Box, Inc. Stock Quote
Box, Inc.
$26.47 (1.15%) $0.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.