Dropbox (NASDAQ: DBX), the cloud storage and collaboration platform, simply completed a fantastic 12 months. However even with the corporate’s income surging, higher profitability and extra clients, its inventory value fell 5% after releasing its fourth-quarter outcomes final week.
Whereas Wall Road merchants do not get a number of love proper now, there’s nonetheless so much to like about Dropbox. Let’s have a look at why this tech inventory is much too low-cost to move up.
How was 2020 for Dropbox?
Whereas Dropbox was as soon as a Silicon Valley darling, market gamers appear to assume its finest days are lengthy behind. At this time, its market cap is $ 9.2 billion, whereas seven years in the past a non-public funding spherical valued the corporate at round $ 10 billion. Regardless of destructive market sentiment, Dropbox’s newest earnings report factors to a brighter future.
Pushed by elevated demand for distant working, Dropbox closed the 12 months with greater than 15 million paid customers, up 8% from the earlier 12 months. Whereas rising its person base, the corporate additionally elevated spending for its present clients by 4%. All of it boils right down to ending 2020 with $ 1.9 billion in income, a 15% enhance from the earlier 12 months.
Revenue margins have additionally improved. In 2020, Dropbox generated $ 491 million in free money move (FCF), a FCF margin of 26%. Compared, his FCF margin for 2019 was solely 24%. CFO Tim Regan stated Dropbox’s purpose is to achieve $ 1 billion in free money move by 2024 with working margins between 28% and 30%.
Dropbox finds price financial savings
In the course of the pandemic, Dropbox selected to completely swap to distant work for many of its workers. Whereas wage prices don’t change an excessive amount of simply due to the change, the bills required for tools and upkeep ought to lower over time.
Since this remote-working strategy additionally means fewer workers use the headquarters, administration determined to sublet their places of work. This variation was additionally accompanied by a depreciation of $ 398 million on the honest worth of its constructing lease. This depreciation didn’t have an actual influence on money move, however allowed Dropbox to report a major GAAP internet loss for the 12 months, leading to decrease taxes.
Along with the associated fee financial savings from the pandemic, it has additionally taken steps to downsize this 12 months, asserting that 11% of its workforce will likely be laid off as the corporate turns to distant working. Whereas layoffs are at all times tough for companies to bear, they will usually end in extra money that may be redeployed elsewhere within the enterprise.
With all the associated fee financial savings, administration was left with extra cash than it wanted. And if a below-market valuation wasn’t intriguing sufficient, Dropbox’s board simply permitted a billion greenback share buyback program. That is along with the $ 600 million in deliberate share buybacks it introduced final 12 months however has but to finish. Whereas stock-based compensation will offset a few of these buybacks, shareholders ought to nonetheless profit from a few of that extra money move because the variety of shares continues to say no.
What’s subsequent for Dropbox?
Constructing on nice train, Dropbox can also be searching for new methods to develop. One among them is a brand new product at present in beta known as Areas. That is an try to grow to be a one cease store for every little thing distant working. With a digital workforce utilizing so many various instruments and providers, Areas hopes to be a hub the place customers can choose up something and every little thing.
Whereas Areas was initially meant to be a brand new function for the standard Dropbox workspace, administration was optimistic sufficient to make it a very stand-alone product. Dropbox at present has over 540,000 companies utilizing its platform, which ought to assist speed up Areas adoption as many customers are already acclimated to Dropbox.
Administration additionally stated it plans to develop by acquisitions, like its buy of HelloSign for $ 230 million in money in early 2019. CEO Drew Houston talked about the success this acquisition is already producing and stated that the corporate was planning investments to assist HelloSign grow to be the usual in digital signature software program.
To wrap up 2020, Dropbox reported $ 491 million in free money move, however solely trades at a market cap of $ 9.3 billion or an enterprise worth (market cap minus internet money) of 8. , $ 2 billion. With an enterprise worth of round 17 occasions its annual money move, Dropbox is buying and selling at a steep low cost in comparison with its cloud storage friends like Microsoft and Alphabet each of that are buying and selling effectively above 25 occasions free money move. General, Dropbox is a well-performing enterprise that trades for a lovely value.
This text represents the opinion of the author, who could disagree with the “official” suggestion place of a premium Motley Idiot consulting service. We’re motley! Difficult an funding thesis – even one among our personal – helps us all to assume critically about investing and make selections that assist us grow to be smarter, happier, and richer.