When most investors hear the term "growth stock," Dropbox (DBX 0.92%) probably isn't the first company that comes to mind. The file storage and content collaboration platform doesn't generate astounding growth figures, but its consistent growth each year has led to impressive long-term results. In fact, despite constant pressure from deep-pocketed competitors like Microsoft and Alphabet, Dropbox has grown its paying subscribers every single quarter since the start of 2017.
Let's see why this overlooked stock continues to churn out steady growth.
What does Dropbox do?
While many people might remember Dropbox for helping eliminate the thumb drive with its easy-to-use cloud file-storage platform, the company has really evolved over the last decade.
Today, although Dropbox still leverages its core cloud storage technology, the company focuses more on helping individuals and teams build and collaborate on content. Similar to Google Drive and Office365, Dropbox allows users to start or upload various forms of content from videos to documents, and iterate on the work in real time with other users.
Now, thanks partly to the acquisitions of HelloSign in 2019 and Docsend in 2021, Dropbox users can work on every step of the content lifecycle in-house. From building content to sharing and receiving analytics to even signing a document, every step of the process can be done within Dropbox.
With this model, the longer users are on the platform, the more content they upload, and the more accustomed they get to using the platform. For most users, this makes switching far more cumbersome, especially for the multiple-person teams that now account for 35% of Dropbox's overall users.
Steady growth
Although Dropbox's competitors offer similar services at a fraction of the cost -- or even free of charge in certain cases -- the company has been able to continuously add new subscribers and get those subscribers to pay more over the years.
While never really growing at a blistering pace in any single year, Dropbox's paying subscribers are up 94% since the start of 2017, and its average revenue per paying subscriber is up 25%. Combined, these metrics have helped Dropbox more than double its revenue during that time period.
But it isn't just the company's sales that should have investors excited. Dropbox has also been improving its profitability and using its profits to benefit shareholders. Dropbox's free-cash-flow margin (free cash flow as a percentage of revenue) has improved from 16% at the start of 2017 to 31% over the last 12 months, and the company's management team has used all of that cash flow, and even some cash on hand, to repurchase its own stock. Since the start of 2020, this repurchase program has led to a 20% decline in the company's total number of shares outstanding.
Between Dropbox's steady growth in sales and increased focus on profitability, the company has more than tripled its free cash flow per share over the last five years. So even though Dropbox doesn't seem like the typical growth stock, since 2018 it has actually grown its free cash flow per share at a faster rate than many of today's tech darlings such as Apple, Meta Platforms, and Salesforce.
Buy and hold
One hiccup many investors might have with Dropbox is the stock's historical performance. Dropbox has had underwhelming returns over the last five years due to a steep decline in the company's valuation following its initial public offering.
DBX PS Ratio data by YCharts
However, investors shouldn't let these previous results deter them from owning Dropbox today. The company now trades at a market cap to trailing-12-month free cash flow multiple of 12.5 times, versus a multiple of more than 30 times following its IPO. And management is helping shareholders capitalize on this cheaper valuation by repurchasing stock at current prices.
With a sticky platform, consistent sales growth, and increased focus on controlling costs, Dropbox strikes me as a business investors should feel comfortable buying and holding for the long haul.
