Dropbox Inc: Here’s Why This Tech Stock Could Soar

This Tech Stock Deserves a Serious Look

With the market going on a choppy ride, what tech stock investors really want is certainty. The good news is, there are tech companies that are well positioned to keep thriving, even in this challenging socioeconomic environment. Dropbox Inc (NASDAQ:DBX) serves as a good example.

Headquartered in San Francisco, Dropbox is a business software company. It started back in 2007 as a cloud storage service provider, helping users back up and share their files. Today, Dropbox offers a global collaboration platform that’s used in about 180 countries.

And even though Dropbox is not exactly a tech giant like Apple Inc. (NASDAQ:AAPL) or Alphabet Inc (NASDAQ:GOOG), it does have a rather substantial user base.

As of March 31, 2020, the company had more than 600 million registered users and 14.6 million paying users. Notably, 80% of Dropbox subscribers use the platform for work. (Source: “Company Presentation May 2020,” Dropbox Inc, last accessed June 18, 2020.)

Investors like tech stocks because they tend to run fast-growing businesses. On that front, Dropbox does not disappoint.

In the first quarter of 2020, Dropbox generated $455.0 million of revenue, representing an 18% increase year-over-year. Excluding the impact of exchange-rate fluctuations, the company’s revenue would have been up 19%. (Source: “Dropbox Announces Fiscal 2020 First Quarter Results,” Dropbox Inc, May 7, 2020.)

As I mentioned earlier, Dropbox had 14.6 million paying users at the end of March 2020. Well, that’s up from 13.2 million from a year ago. People are also paying more to use the company’s platform. Dropbox’s average revenue per paying user came in at $126.30 in the first quarter, up 4.4% from the year-ago period.

The business became more lucrative, too. In the first quarter, the company achieved adjusted gross margin of 78.3% and adjusted operating margin of 16.1%. To put that in perspective, DBX’s prior-year period adjusted gross margin was 75.4% and its adjusted operating margin was 10.1%.

At the bottom line, Dropbox Inc earned adjusted net income of $69.8 million in the first quarter of 2020, up 67.4% year-over-year. The company also generated $25.5 million in free cash flow for the quarter.

In fact, Dropbox’s business has been firing on all cylinders for quite a while. The chart below shows the company’s revenue in each of the last three years.

Dropbox Inc Revenue (Millions)

(Source: “Company Presentation February 2020,” Dropbox Inc, last accessed June 18, 2020.)

Mind you, the top-line number is not the only thing that’s been trending up. Over the past three years, Dropbox also managed to grow its adjusted operating income from $60.0 to $205.0 million. That’s a total increase of 242%! (Source: Dropbox Inc, May 7, 2020, op. cit.)

And that growth momentum is expected to continue. Chief Financial Officer Ajay Vashee said the following in Dropbox Inc’s latest earnings conference call:

For the second quarter of 2020 we expect revenue to be in the range of $463 million to $466 million. On a constant currency basis, we estimate that revenue would be approximately $5 million higher. We expect non-GAAP operating margin to be in the range of 16.5% to 17.5% and diluted weighted average shares outstanding to be in the range of $417 million to $420 million based on our trailing 30 day average share price.

(Source: “Dropbox, Inc. (DBX) CEO Drew Houston on Q1 2020 Results – Earnings Call Transcript,” Seeking Alpha, May 7, 2020.)

Why Dropbox Inc Could Be an Opportunity

So we know that Dropbox looks rock-solid on the growth front. But what about the coronavirus pandemic, which has led to a major slowdown in the world economy?

Well, that’s exactly where Dropbox Inc’s smart workspace business could come to the rescue. You see, even though the company started as a cloud storage service, it now offers a global collaboration platform that incorporates content management, collaborative apps, professional sharing, project management, and document workflow.

In other words, if more people have to work from home due to the coronavirus outbreak, it could lead to increased usage of Dropbox’s services.

Dropbox Inc (NASDAQ:DBX) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

Dropbox stock tumbled in March, which shouldn’t come as a surprise, given how much the broader market was plunging due to the coronavirus outbreak.

But since then, the company’s share price has bounced back, and is actually up 27% year-to-date. Because of Dropbox Inc’s rock-solid business, investors of DBX stock could expect bigger rewards in the long term.