When most people hear the name Dropbox (DBX 0.92%), they probably remember a tech darling of yesteryear that was swept away by competitors like Microsoft, Alphabet, and Apple. And they wouldn't be entirely wrong either, as Dropbox's current market cap of $9 billion still sits below the $10 billion private market valuation it received in 2014.
But these numbers don't tell the whole story. In fact, since its IPO a little over five years ago, Dropbox has quietly grown its users, revenues, and profits every single year. Let's take a look at why Dropbox is consistently able to grow despite daunting competition from the world's largest tech giants.
A high-value user base
When Dropbox first went public in Feb. 2018, the company boasted a paying subscriber base of 11 million people. Fast forward five years, and Dropbox is now nearing 18 million paying subscribers for just over a 10% compound annual growth rate. While that might not be the kind of astounding user adoption that many tech investors are accustomed to today, the growth has been remarkably consistent. Dropbox has now gradually increased its paying subscriber base for 25 straight quarters in a row.
Image source: Getty Images.
But with several of Dropbox's competitors offering file-storage solutions for free (Google Drive) or integrating them within a more holistic software bundle (Microsoft 365), it begs the question: Why is Dropbox still able to attract so many paying users? Insert content collaboration.
Roughly a decade ago, Dropbox began shifting its focus from cloud-based file storage for individuals to collaboration on shared content for teams. This shift has not only helped drive new user adoption, thanks to the customers themselves adding new seats but also increased switching costs as it's much tougher to adopt and retrain a whole team on a new system than for a single individual.
To further optimize the platform for small to medium-sized teams, Dropbox has been acquiring and introducing lots of new business-focused features to its platform over the years. For example, in 2019, Dropbox acquired the e-signature provider Hellosign for $230 million, and two years later, it acquired the document-sharing and analytics platform DocSend for $165 million. Both acquisitions now help Dropbox customers manage the entire end-to-end lifecycle of a document, from collaborative creation to password-protected sharing and even the final signatures.
The value of these consistent improvements in the platform is also showing up in how much customers are willing to pay. In fact, since going public, Dropbox's average revenue per paying user has jumped from $113.39 to $138.97 a year.
Dropbox by the numbers
Thanks to the growth and stickiness of Dropbox's subscriber base and the limited variable costs required to run the business, Dropbox is becoming increasingly profitable. Over the last 12 months, Dropbox generated roughly $2.4 billion in revenue, up 114% from five years prior, and in that same time, the company's free-cash-flow margin has expanded from 25.5% to 32.5%.
But Dropbox isn't just looking to increase its total free cash flow. Management has demonstrated that it's also focused on growing free cash flow per share. The company has helped increase this figure by repurchasing a substantial amount of stock as of late. In fact, since the fourth quarter of 2018, Dropbox has reduced its total shares outstanding about 15%, in turn helping Dropbox almost triple its free cash flow per share.
Is Dropbox a buy?
This focus on maximizing per-share value shouldn't come as much of a surprise since Dropbox's current CEO and co-founder, Drew Houston, is the largest shareholder by far with a 25% stake in the company. But despite the impressive financial growth and clear shareholder alignment from the management team, investors seemed to have soured on the stock. Today, Dropbox is valued at a price to free cash flow of roughly 12 times, which is well below its historical average.
Data by YCharts.
Assuming Dropbox can continue growing both revenue and cash flow while repurchasing shares, this stock looks poised to generate strong returns for investors from here.
