Since August, when it reported quarterly strong results, Dropbox (NASDAQ:DBX) gave up much of its gains. Dropbox stock fell in a downtrend, bottoming at below $19.00 last month.

Source: Allmy / Shutterstock.com

Dropbox posted annual recurring revenue grew 17% year-on-year to $1.93 billion in the second quarter.

Paying users grew by 10% Y/Y, while gross margins improved from 75.8% to 79.2%. The company posted non-GAAP operating income of $96 million (per slide 27), more than double from last year.

If history is a guide, Dropbox will have trouble shaking off the high expectations from investors. The file-sharing service is easily replaceable from other service providers.

For example, Google (NASDAQ:GOOG) has Google Drive, which is free for its users, while Microsoft (NASDAQ:MSFT) offers OneDrive.

A Closer Look at Dropbox Stock

To stand out from the competition, Dropbox must prove to investors that its product developments will pay off. If HelloSign catches on with new and existing customers, margins and revenue will grow. HelloSign is a service that supports such features as signer attachments and advanced signing and reporting.

At the Citi Global Technology Conference, Chief Accounting Officer Tim Regain highlighted the opportunities that HelloSign offers.

For example, it has the chance to accelerate the uptake of HelloSign. Usage is up 25% relative to pre-Covid levels. So, as customers try out the service and experiment with the “smart workspace” feature, user engagement will continue climbing.

Investors may assume revenue growth increasing over the next five years. In this 5-Year Discounted Cash Flow Growth model, consider this revenue trajectory:

Data model courtesy of finbox

Readers may click on the finbox link to change the estimates and to come up with another fair value. Otherwise, a 4.5% perpetuity growth rate and the metrics shown below will value Dropbox stock at around $24.00.

Key Drivers

As previously mentioned, Smart workspace is a new feature. Dropbox added it last year and saw engagement rise by 100,000 users sequentially. As 450,000 of its business teams use the new Dropbox, they will figure out efficient ways to suit the work-from-home space.

Tim Regan did not look at the other offerings as competition.

“We don’t know where to find our various documents and whether it’s a cloud doc or a Microsoft doc or Adobe, Google, content is everywhere,” he said. “And we are constantly toggling between tools, whether it’s our Slack or Zoom or Atlassian or Dropbox, constantly bouncing around between tools.”

From a practical sense, Dropbox is a “go between” for sharing content among companies and clients who are on a different platform. So long as one of the sharers has a Dropbox account, the recipient may get documents electronically.

Investors need to look carefully at the company’s future average revenue per user (“ARPU” or “ARR”). As long as that metric grows, Dropbox, whose shares trade at unfavorable valuations, will have upside.

Data courtesy of Stock Rover

In the table above, Dropbox scores lower than the index on value, due to the price-to-earnings ratio. As profits expand, the multiple will decline.

Your Takeaway

Dropbox is an attractive, out of favor technology stock. The work from home trend is only accelerating and in the next few quarters, the company’s sales will grow as a result.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.