The One Tech Stock Value Investors Should Buy Right Now
Drop box (NASDAQ: DBX) has been a huge disappointment for shareholders since its IPO in 2018. Since its initial public offering (IPO) in 2018, the stock is down more than 10%, while the S&P 500 The index has increased by almost 74% during this period. After releasing its third quarter results on November 4, Dropbox’s stock fell sharply and is now down 15% in the past month.
Feedback for Dropbox shareholders has been poor. However, the company is doing quite well at the moment, providing a buying opportunity for long-term investors. Here are some reasons why value investors should buy Dropbox stocks now.
Image source: Getty Images.
Sustainable revenues and user growth
In the third quarter, Dropbox again increased its revenue and user base. Total revenue was $ 550.2 million during the period, up 12.9% year-over-year, and annual recurring revenue (ARR) was $ 2.2 billion, up 12% year-over-year. Since Dropbox is primarily a subscription business where customers sign annual or monthly plans, ARR is a great measure of the health of the business.
This solid growth comes from an increase in the number of paid users, from 15.3 million a year ago to 16.5 million today, and growth in average revenue per user (ARPU) of 128, $ 0 to $ 133.8. This extension is no coincidence either. Since 2019, when Dropbox reorganized its product organization and expanded from file storage only, revenue per share has steadily increased. With a big market opportunity ahead as it tries to convert Dropbox’s 500 million free tool users into paid subscribers, this trend is expected to continue in the future.
DBX Income Per Share (TTM) data by YCharts
Strong cash generation
Unlike many tech companies, Dropbox is actually profitable. The key metric to track is free cash flow, which is the excess cash flow that a business generates after making its capital expenditures. In 2021, Dropbox expects to generate $ 715 million in free cash flow, up sharply from the $ 491 million it reported last year.
What is Dropbox doing with all this money? Return it to shareholders through share buybacks, which reduced Dropbox’s stock count from around 420 million two years ago to 382 million today. This is beneficial to existing shareholders as it increases their percentage of ownership of Dropbox and the free cash flow its business generates per share they own.
DBX shares exceptional data by YCharts
Increase in product speed
Dropbox is not on its heels. Management believes there are still many products they can add to the main workflow and file sharing platform. These include recent product launches like a video collaboration tool called Replay, a visual communication tool called Capture, and a shopping feature called Shop.
None of these products are game-changing for Dropbox, but will hopefully add to the value proposition of a Dropbox subscription. Investors can see this translate into more ARPU growth and a reduced churn rate, which management believes happened in the third quarter. Finally, Dropbox recently announced the acquisition of Command E, a desktop search tool that could be a nice integration into the Dropbox platform.
With sustainable growth, strong profitability, and more and more products, it’s surprising to see Dropbox’s market cap at just $ 9.6 billion. If the company can meet its free cash flow target of $ 715 million for this year, that would give the stock a price to free cash flow (P / FCF) ratio of 13.4. Or, in other words, investors in Dropbox are earning around 7.5% cash per year (called free cash flow return) by buying shares of Dropbox right now.
If Dropbox can continue to grow its users and ARPU, that free cash flow figure is expected to continue to climb over the next several years. Ultimately, Dropbox’s stock should follow suit.
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Brett Schafer owns shares of Dropbox, Inc. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.