Dropbox's (DBX 3.18%) 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 -0.08%), 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.