In early July, I wrote that Dropbox (NASDAQ:DBX) stock was one of the best work-from-home stocks to buy to play the office virtualization megatrend, as DBX stock was materially undervalued relative to its work-from-home peers.
Over the span of the next 30 days, DBX stock rose roughly 20%.
Then Dropbox reported second-quarter earnings, and while the numbers were good, the company simultaneously announced that its CFO was surprisingly departing the company for a career in venture capital.
The surprise departure spooked investors. DBX stock dropped. All the way back to $20, or where shares traded when I first issued my bullish call on Dropbox stock.
I say buy the dip. The CFO departure isn’t more meaningful than the company’s strong fundamental growth trends, and those growth trends support DBX stock up near $30 today, not down at $20.
So buy Dropbox stock for nearly 70% upside potential over the next few quarters.
Here’s a deeper look.
Strong Earnings and DBX Stock
The second-quarter earnings were very good.
The company added 400,000 customers in the quarter, up 10% year-over-year. Average revenue per user (ARPU) rose 5%. Total revenues rose 16%. Going forward, management is guiding for this momentum to persist thanks to office virtualization tailwinds driving new customer growth and new products — such as Passwords, Vault, Back-Up, and Family, to name a few — driving ARPU growth.
Third-quarter revenues are expected to rise 13%. Fourth-quarter revenues are expected to rise about 11%.
Perhaps more impressively, gross margins rose 350 basis points in the quarter, and full-year gross margins are expected to rise 200 basis points. This gross margin improvement is being driven by management’s infrastructure layer innovation to drive down storage unit costs.
Equally as important, management is letting Covid-19 office virtualization tailwinds drive new customer growth, as opposed to marketing. So marketing dollars fell big in the quarter. Total opex dollars rose just 4%. Operating margins expanded more than 10 points, and third-quarter operating margins are expected to rise more than 5 points.
All in all, it was a really solid quarter from Dropbox, which broadly confirms that DBX stock is a long-term winner.
Dropbox Stock Is Undervalued
Relative to its work-from-home peers, Dropbox stock is insanely undervalued.
DBX stock trades at less than 5-times trailing sales. In a sea of richly valued work-from-home stocks, DBX’s 5-times trailing sales multiple stands out. In a big way.
Slack (NYSE:WORK) stock trades at nearly 23-times sales. Atlassian (NASDAQ:TEAM) stock trades at 26-times sales. Zoom (NASDAQ:ZM) stock trades at 92-times sales. DocuSign (NASDAQ:DOCU) stock trades at 35-times sales.
In other words, DBX stock is just about the only reasonably valued work-from-home enterprise tech stock in the market.
There’s a reason for that. Slack, Atlassian, Zoom and DocuSign all have a potential to reach global enterprise ubiquity. Dropbox does not, given huge competition in the storage space and overlapping client use-case with more all-in-one enterprise tech platforms.
But this discount is also overdone. Dropbox does have unique value-props — such as cross-platform storage capability, scalability among both individuals and enterprises, as well as seemingly infinite integrations — which ensure that office virtualization will continue to promote broader adoption of Dropbox’s digital storage solutions over the next several years.
Assuming the company can continue to add around 300,000 to 400,000 new paying users every quarter, leverage its strong land-and-expand model to keep growing average revenue per user and improve profit margins with scale towards management’s long-term targets, then my modeling suggests that Dropbox is on its way towards netting $1.75 in earnings per share by 2025.
Based on a systems software sector-average 25-times forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for DBX stock of $30.
Bottom Line on DBX Stock
In a sea of richly valued work-from-home stocks, DBX stock offers investors the only attractively valued way to play the office virtualization megatrend.
So buy the dip in DBX stock.
The numbers were good. The growth drivers remain favorable. And the valuation remains discounted.
That’s a recipe for success.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own a position in any of the aforementioned securities.