Dropbox (DBX 0.63%) went through the classic rise and fall of a Silicon Valley start-up. A decade ago, the company was growing like gangbusters due to its innovative cloud file-sharing and storage services, even getting legendary Apple founder Steve Jobs trying to buy it out for almost $1 billion.

But the start-up world moves on to shiny new objects quickly, and by the late 2010s investors and news outlets stopped covering Dropbox en masse. The disregard for Dropbox has continued since its 2018 initial public opening (IPO). Shares are actually down from its IPO price of $21, even though Dropbox has put up consistent growth in users, revenue, and profits over the last five years.

Here's why I think Wall Street is underestimating Dropbox, making the stock an easy buy for investors today.

Layoffs: Getting efficient or measures of last resort?

Over the last few years, Dropbox has gone through multiple rounds of layoffs. In 2021, it fired 11% of its workforce with another 11% let go in August 2022. The company has gone for round three in 2023, announcing last week it was going to lay off 16% of its staff.

Investors generally take layoffs as a bad sign for a company's growth potential. You could see that last week as shares of Dropbox dropped by around 5% in the days following the news. However, I would look under the hood at this specific case and argue it is actually a positive indicator for Dropbox's financials. First, the company said it met its revenue growth and operating margin guidance for the first quarter, with more details coming out later this month when its full earnings report will be released.

Second, take a look at Dropbox's growth in free cash flow per share after its first round of layoffs in 2021. You can clearly see in the chart below that in 2021 the company's free cash flow per share was just above $1 and has almost doubled to $2.10 over the last 12 months. This tells me the company wasn't hurt when laying off employees, but rather it benefited from it. Once the company absorbs the severance costs of these most recent layoffs, I expect free cash flow per share to continue growing.

DBX Free Cash Flow Per Share Chart

DBX Free Cash Flow Per Share data by YCharts

Long-term growth is indisputable

So what has driven this growth in free cash flow per share? It's simple. Along with trimming its expense structure with fewer employees, Dropbox has consistently grown its paying users and average revenue per user (ARPU), driving consistent top-line revenue growth. At the end of 2022, Dropbox had 17.8 million paying users, up from 12.7 million at the end of 2018. ARPU was $134.53 compared to $119.61 in 2018.

Combine these two metrics and Dropbox's 2022 revenue was $2.3 billion compared to just $1.4 billion in 2018. With total operating expenses barely up over that time period, Dropbox has started generating tons of cash for shareholders each and every year.

With the current round of layoffs, CEO Drew Houston told employees and investors that the company would be taking these cost savings and reinvesting into artificial intelligence (AI) products for its customers. While it is unclear what exact AI tools the company is planning, this can hopefully drive the next leg of growth in paying users. In the letter, Houston said that some of these products will come to market this year. 

Is the stock cheap? Yes.

Since Dropbox's stock hasn't budged since 2018, investors can now buy shares at a significant discount. This year, Dropbox is guiding for $825 million to $855 million in free cash flow that will grow to $1 billion in 2024. Combine this with a consistent buyback program (shares outstanding are down 14.4% in the last three years) and Dropbox's free cash flow per share -- the true driver of shareholder value -- should continue growing at a handsome pace.

As of this writing, Dropbox has a market capitalization of $7.2 billion. This gives the stock a forward price-to-free-cash-flow (P/FCF) ratio of 8.7 based on the low end of the 2023 guidance and a measly 7.2 based on its 2024 goal. For a company that is consistently growing revenue and returning cash to shareholders, a forward P/FCF below 10 feels much too low. This is why I think Dropbox is set up to outperform the market over the next five years and beyond.