When the Nasdaq fell for three straight weeks, Dropbox (NASDAQ:DBX) sank with it. Investors have a short-term memory and forgot that the file-sharing service posted strong second-quarter results on August 6. Dropbox stock touched $23.00, giving it “multiple tops” on that day.
Besides a rebound by technology stocks, what will it take for Dropbox to end its downturn which started in June?
Dropbox Stock Falls After Hitting Multiple Tops
Dropbox tried, but failed, to break out above the $23.00-$24.00 level earlier this year. After the Q2 earnings report, investors sold off the shares, as you can see from the chart from Stock Rover below.
The company’s revenue climbed 16.4% year-over-year to $467.4 million. It posted earnings per share of 22 cents, exceeding analysts’ average estimate.
Further, Dropbox’s margins expanded YOY in Q2, while its annual recurring revenue rose 17% YOY to $1.931 billion. Its paying user base increased from 13.6 million in Q2 of 2019 to 15 million last quarter. Despite the strong results, many investors sold Dropbox stock.
Investors might be worrying that competing offerings will badly hurt Dropbox in the future. For example, Alphabet’s (NASDAQ:GOOG) Google Drive and Microsoft (NASDAQ:MSFT) OneDrive look the same as Dropbox’s storage solution. Plus, both mega-cap firms offer better work-collaboration tools than Dropbox.
Specifically, Dropbox’s desktop app shows recent activity and lets users quickly access files while enabling members of their team to comment on files. Moreover, Microsoft’s Office 365 includes a powerful productivity suite of solutions alongside its shared storage space.
Without a moat, Dropbox’s revenue growth may decline in future quarters.
Dropbox reported that the number of individuals trying out its product rose 20% relative to pre-Covid levels. Chief Accounting Officer Tim Regan said that the conversion rates of free-trial participants to paid users have remained steady.
HelloSign, an e-signature and document workflow company that Dropbox acquired, could take on DocuSign (NASDAQ:DOCU). Investors who think Dropbox’s e-signing solution is comparable to DocuSign may buy Dropbox stock instead of DOCU stock.
Dropbox trades at a forward price–earnings ratio of around 20 times. Conversely, DocuSign trades at stratospheric P/E levels that are not worth mentioning.
Dropbox’s strategy of moving its users from its basic offering to its its team solutions should cause its paid user base to climb further. As a result, its average revenue per user should increase over the next few quarters, especially when the work-from-home trend accelerates.
The trend should accelerate because around the world, the spread of the novel coronavirus is increasing again. HelloSign should also benefit from the coming acceleration of the work-from-home trend.
Analysts are bullish on Dropbox’s prospects, as their average price target on the name is $27.57, according to Tipranks. Dropbox’s efficiency rating is in the 82nd percentile of the Software Industry Group, indicating that it is well-run.
With Dropbox’s margins expanding, investors who buy the stock at its current levels or lower will get rewarded. The market, however, may take a few months to recognize Dropbox’s performance. So, investors who buy Dropbox stock need to be patient.
About 600 million people use Dropbox, and that number is continuing to grow. But the firm may adjust the features of its free offering. For example, it may add features that help students. Or it may create another solution for a different vertical market. Such innovations are especially important during the pandemic.
Dropbox needs to obtain more paying customers. As those users familiarize themselves with the firm’s strong product and become more comfortable with its ecosystem, Wall Street will take notice.
Price Target and the Bottom Line on Dropbox Stock
Assuming the following metrics, Dropbox is worth around $23.00 per share:
|Discount Rate||8.5% – 7.0%||8.00%|
|Perpetuity Growth Rate||3.5% – 4.5%||4.00%|
|Fair Value||$18.38 – $35.54||$22.61|
The model was published by finbox (click on this link to change assumptions).
Dropbox stock will likely rally after the company posts another strong quarterly report and raises its guidance.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.