Dropbox (NASDAQ:DBX) went public in March 2018 at $21 per share, surged to nearly $40 just three months later, then gradually gave up those gains and settled back to the low $20s. The cloud storage service provider initially impressed the bulls with its robust growth in users and revenue. But after a few quarters, its decelerating growth, lack of profits, and narrow moat attracted the bears.

For now, Dropbox's fate remains uncertain as its stock hovers near its IPO price. Let's take a fresh look at this oft-overlooked cloud player to see if it's more attractive to the bulls or bears.

A network of cloud storage devices.

Image source: Getty Images.

An early mover in the cloud storage space

Dropbox provides free and paid cloud storage services for individuals and enterprise customers. Its free tier offers individual users 2GB of cloud storage. Its $9.99 per month plan (billed annually) offers 2TB of storage, and its $16.58 per month plan offers 3TB. It also offers variable business plans tailored to a company's size and needs.

Dropbox and its rival Box (NYSE:BOX) were both early movers in the cloud storage market, but both companies now face fierce competition from Alphabet's Google, Microsoft, and Amazon -- which all host similar cloud storage services.

Those tech giants can afford to bundle their cloud storage services with other products at cheaper prices. However, Dropbox and Box remain popular choices for companies that don't want to tether themselves to Google, Microsoft, and Amazon's tech ecosystems.

How fast is Dropbox growing?

Dropbox's investors should mainly focus on its growth in revenue, paying users, its average revenue per paying user (ARPPU), and its gross and operating margins. All five metrics improved sequentially and annually last quarter:

Metric

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Revenue Growth (YOY)

22%

18%

19%

19%

18%

Paying Users (Millions)

13.2

13.6

14.0

14.3

14.6

ARPPU

$121.04

$120.48

$123.15

$125.00

$126.30

Gross Margin

75.4%

75.8%

76.7%

77.6%

78.3%

Operating Margin

10.1%

10.1%

13.1%

15.6%

16.1%

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

During last quarter's conference call, CEO Drew Houston stated: "These results underscore the strength of our global collaboration platform, our efficient go-to-market strategy, and our operational discipline."

Houston noted the COVID-19 crisis brought more clients to the platform instead of disrupting its business. Between mid-March and its last report in early May, daily Dropbox Business team trials rose about 40% over pre-pandemic levels. Dropbox also added new integrated features for Zoom Video Communication's (NASDAQ:ZM) popular video conferencing service, and those tools experienced a 20-fold jump in usage between February and April.

Dropbox attributed its gross margin improvement to its expanding scale and infrastructure and expects that expansion to continue for the full year. Lower marketing expenses, which it attributed to "greater efficiencies" in spending, lifted its operating margin.

Those higher margins, along with its stable revenue growth, enabled Dropbox to post a GAAP profit of $39.3 million in the first quarter, marking its first-ever quarter of GAAP profitability. Furthermore, Dropbox expects to remain profitable on a GAAP basis for the full year -- while its rival Box remains deep in the red.

A rosy forecast and a reasonable valuation

Dropbox expects its second-quarter revenue to rise 15%-16% annually, and for its non-GAAP operating margin to expand to 16.5%-17.5%. For the full year, it expects its revenue to grow 13%-15%, and for its non-GAAP operating margin to rise to 17.5%-18%.

Dropbox didn't provide any earnings guidance, but Wall Street expects its non-GAAP earnings to rise 46% for the year -- which is a high growth rate for a stock that trades at 31 times forward earnings.

Dropbox's stable growth and expanding margins suggest its moat is wide enough to fend off its bigger challengers. Its stock remains surprisingly cheap relative to its growth, and I believe it could attract more bulls if it meets or beats its own guidance with its third-quarter report on Aug. 6.