2021 was yet another strong year for the file sharing and content collaboration company Dropbox (DBX 2.34%), which reported its fourth-quarter earnings on Feb. 17.
But despite the positive results, Dropbox stock remains flat over the last year and just slightly above its IPO price from four years ago. Let's see whether Dropbox could provide good value for investors today.
Image source: Getty Images.
Steady earnings growth
It's no secret that Dropbox is facing fierce competition within the content collaboration sector. Companies like Alphabet with its Google Drive product and Microsoft with its OneDrive service are able to offer steep discounts and compelling bundles to potential customers. Yet in the face of these substitute products, Dropbox's 2021 results demonstrated continued growth across the board.
Starting with its customer count, the company added about 1.3 million new paying users during the year to reach a total count of 16.8 million -- up 8.5%. But it isn't just the new users driving growth. The trends taking shape among Dropbox's current user base look promising as well. Average revenue per user increased 4.1% in 2021, while churn improved each quarter throughout the year.
To add to Dropbox's top-line strength, the company was also able to increase its profit margins thanks to several cost improvements. Adjusted gross margin rose 140 basis points to 80.8% for the year as a result of "hardware efficiencies," and its free cash flow margin jumped from 25.6% to 32.8% for 2021 due to lower overall operating expenses.
Building the digital office
Not all of Dropbox's improvements from this year can be found in its financial statements.
The company also added several enhancements to its platform that should help its customers work more efficiently in a digital environment. Whether it's the rebuild of its mobile experience, better screen capture and editing tools, or easier onboarding for new team members, Dropbox is making several much-needed tweaks to minimize friction for its users.
But it's also taking much larger steps to help its customers through acquisitions. During the year, Dropbox closed on its deals with DocSend and Command E, which should both provide tons of added value for customers. DocSend is a secure file sharing and analytics platform that helps users control who can access their documents and provides real-time feedback and analytics on those shared documents. Command E, on the other hand, is a universal search tool that helps users easily find and organize all of their cloud content.
So whether it's through small iterations to the platform or added functionality through acquisitions, Dropbox is continuing to invest in remote collaboration and workflow. CEO Drew Houston even reiterated his confidence in the industry on the company's latest earnings call when he stated, "[I]t's clear to us that the shift from working primarily in physical offices to working primarily in digital screens is a permanent one."
Valuation
Despite what most investors would probably consider an all around strong year, Dropbox's stock performance has been rather underwhelming. This disconnect between the business results and market returns has resulted in an enticing valuation.
Today, Dropbox trades at an enterprise value (market cap minus net cash) of roughly $8 billion, and over the last 12 months, the company generated $708 million in free cash flow, valuing the business at an enterprise value-to-free cash flow ratio of about 11 times -- well below the market average.
To capitalize on this low valuation, Dropbox's board of directors just authorized a $1.2 billion share repurchase program on top of the $344 million remaining on its existing program. Assuming both programs are fully exhausted, Dropbox could buy back about 19% of its total shares outstanding at current prices, which would significantly increase the company's free cash flow per share.
If Dropbox is able to reach its target of $1 billion in free cash flow by 2024 -- a 41% increase from its 2021 figure -- and the company maxes out its stock buyback program, Dropbox should deliver exceptional returns for investors going forward.
