Dropbox (DBX 0.92%), the file storage and content collaboration platform, is often neglected by investors due to the fierce competition from deep-pocketed companies like Microsoft and Alphabet. Yet despite this mounting competitive pressure, Dropbox's stock is up more than 15% in the last six months as the company continues to churn out impressive financial results, and its most recent second-quarter earnings were no exception.
Let's see why this seemingly simple business continues to delight shareholders.
Dropbox's Q2 by the numbers
In its second-quarter report, Dropbox announced that it surpassed 18 million total paying users, which is 4% higher than the figure from a year ago. While Dropbox's single-digit percentage growth in subscribers certainly isn't all that exciting, it sure is consistent.
In fact, despite the competition from lower-cost alternatives like Microsoft's Office365 and Alphabet's Google Workspace, Dropbox has grown its paying user base every single quarter for the last 26 straight quarters. On top of that, Dropbox has been implementing price increases across a number of its plans over the last year, which has resulted in 4% growth in its average revenue per paying user.
Between Dropbox's growing user base and higher spend per payer, the company's annual recurring revenue stood at $2.5 billion at the end of the quarter. But it's not just the top-line growth that has captured investor interest. Dropbox's free cash flow as a percentage of revenue has gone from 25% to 35% in the last three years if you exclude the one-time severance charges the company incurred from its recent layoff.
And Dropbox has been using that cash flow to repurchase its own shares at an impressive rate. Since the start of 2020, Dropbox's total share count has declined 20%, which has helped the company more than double its free cash flow per share in just under four years.
Thanks to this continued sales growth and reduction in head count, Dropbox CFO Tim Regan reiterated that he believes the company can reach its target of $1 billion in free cash flow for 2024.
DBX Free Cash Flow Per Share data by YCharts
Business improvements
While the financial performance has been quite impressive in recent years, shareholders aren't the only group that Dropbox is pleasing. The company has also rolled out a number of tools and new features that have enhanced the user experience.
For example, Dropbox is home to more than 600,000 business teams, and thanks to the company's recent acquisitions of DocSend and HelloSign, those teams can now send and receive documents for signature in 21 different languages or control and track the analytics of a specific document -- all without leaving the Dropbox platform.
But Dropbox serves more than just businesses. In 2020, the company launched a family plan that enables families to securely store, organize, and edit all sorts of file types. This includes features like password-protecting sensitive documents to collaborating or commenting on videos with Dropbox Replay. While these products might not be huge selling points individually, all these features combined help to increase the value of the platform overall.
This increased customer value is perhaps best demonstrated by Dropbox's actual financial results. Despite continuously increasing the average revenue per paying user, Dropbox's subscriber base has done nothing but grow.
Is Dropbox a buy?
Although Dropbox's stock has risen sharply in the last six months, it still appears to trade at an attractive valuation today. Using management's estimate of $1 billion in free cash flow for next year, Dropbox's price-to-forward free cash flow multiple stands at under 10x, given the current market cap of $9.6 billion. That doesn't seem too demanding for a business that has demonstrated such consistent growth and continues to return capital to shareholders.
For any long-term investors looking for steady growth, I think Dropbox deserves a spot in your portfolio.
