Dropbox (DBX +1.78%) went public in early 2018, but the cloud storage service provider's stock still remains below its IPO price of $21. Let's see why Dropbox was left behind as many other cloud service stocks rallied, and whether or not it's still worth buying.
An early mover in a crowded space
Dropbox and its main rival Box (BOX +5.98%) were both founded over a decade ago. Both companies operate "freemium" cloud storage services.
Dropbox's free tier provides individual users with 2GB of cloud storage. Individuals who pay $9.99 a month get 2TB of storage, or they can get family plans that split 2TB among up to six users for $16.99 a month. For enterprise users, Dropbox offers business plans that start at $12.50 per user each month.
Image source: Getty Images.
Dropbox's plans are pricey relative to those of its industry peers. Box's free tier offers individuals 10GB of storage, and they can upgrade to 100GB for $10 a month. Box also offers business plans that start at just $5 per user each month.
Dropbox and Box both face fierce competition from Microsoft's (MSFT +1.69%) OneDrive and Alphabet's (GOOG +0.05%) (GOOGL 0.04%) Google Drive, which provide 5GB and 15GB of free cloud storage, respectively. Both tech giants can afford to undercut Dropbox and its peers to tether more users to their sprawling ecosystems.
Dropbox controls 21% of the cloud storage market, according to Datanyze, putting it in second place behind Google Drive (34%) and ahead of OneDrive (12%). Box ranks fifth with a 5% share.
Dropbox is a top cloud storage provider, but investors still seem concerned about the looming competition. But if we look at Dropbox's fundamentals, we'll notice it isn't being crushed in a crowded market.
Dropbox is still growing
Dropbox's revenue rose 14% year over year to $487.4 million in the third quarter. That marked a slight deceleration from its previous quarters, but it comfortably beat analysts' expectations by $3.8 million.
Moreover, Dropbox's number of paying users, average revenue per paying user (ARPPU), and its gross and operating margins all improved sequentially and year over year during the third quarter:
|
Metric |
Q3 2019 |
Q4 2019 |
Q1 2020 |
Q2 2020 |
Q3 2020 |
|---|---|---|---|---|---|
|
Revenue Growth (YOY) |
19% |
19% |
18% |
16% |
14% |
|
Paying Users (Millions) |
14.0 |
14.3 |
14.6 |
15.0 |
15.3 |
|
ARPPU |
$123.15 |
$125.00 |
$126.30 |
$126.88 |
$128.03 |
|
Gross Margin |
76.7% |
77.6% |
78.3% |
79.2% |
80% |
|
Operating Margin |
13.1% |
15.6% |
16.1% |
20.6% |
23% |
YOY = Year over year. ARPPU = Average revenue per paying user. Non-GAAP margins. Source: Dropbox.
Dropbox attributes that growth to its integration with other collaboration services -- including Zoom Video Communications, Microsoft Office, Slack, and salesforce.com -- which all benefited from remote work, online education, and other stay-at-home trends during the pandemic.
Other tools, including HelloSign for digital signatures and Dropbox Transfer for sending files, unite those services to make Dropbox a collaboration platform (instead of a basic cloud storage service) for many large companies. Dropbox and Box are also popular with companies that don't want to be locked into Microsoft and Google's prisoner-taking ecosystems.
Stable profit growth
Dropbox's expanding margins in the third quarter -- which it attributed to cost efficiency gains across its infrastructure hardware, more prudent spending during the pandemic, and a postponed brand campaign -- also indicate it will remain firmly profitable for the foreseeable future.
Dropbox's non-GAAP net income nearly doubled year over year to $110.2 million, or $0.26 per share, during the third quarter and beat estimates by seven cents. On a GAAP basis, it posted a profit of $32.7 million, compared to a net loss of $17 million a year earlier.
By comparison, Box is only profitable on a non-GAAP basis, and it expects to remain unprofitable on a GAAP basis for the full year. Therefore, economies of scale are seemingly kicking in for Dropbox, but not for Box.
Rosy guidance and a cheap valuation
Dropbox expects its fourth-quarter revenue to rise 11%-12% year over year with a non-GAAP operating margin of 22%-22.5%. That sequential contraction in its operating margin isn't surprising, since it shifted its planned brand campaign from the third to fourth quarters.
For the full year, Dropbox expects its revenue to rise 15%, versus its prior forecast for 14% growth, with a non-GAAP operating margin of "approximately" 20% -- compared to its previous guidance of 18%-18.5%.
Analysts expect Dropbox's revenue to rise 15% this year and 11% next year. On the bottom line, the company expects its non-GAAP earnings to grow 68% this year and 14% next year -- which are impressive growth rates for a stock that trades at just 21 times forward earnings.
Based on these facts, Dropbox looks like an undervalued growth stock. Investors shouldn't ignore the competition, but Dropbox's high market share, its consistent growth in users and ARPPU, and its expanding margins all indicate it will continue locking in enterprise customers.
