With so much attention on high-growth tech stocks, has everyone forgotten about Dropbox (NASDAQ:DBX)? DBX stock hasn’t done much over the last five years, down about 8% in that span. Worse, Dropbox doesn’t even have a dividend that can offset some of the underperformance of its stock price. However, the stock has been coming back to life. Shares are up 18.3% so far this year and about 30% over the last 12 months.
While that doesn’t negate the past several years of performance, it’s a start. And to be honest, what Dropbox has done over the past few years isn’t the main concern. Instead, it’s what the company will do going forward.
Dropbox is an interesting company. It’s not a mega-cap tech stock. It’s also not a high-growth mid-cap stock. It sits somewhere in between moderate growth and mid-cap stock. That doesn’t mean it’s a bad business though.
Breaking Down Dropbox
Dropbox is a software-as-a-service (SaaS) company that attempts to help teams stay organized and productive. In the company’s words:
“Most ‘productivity tools’ get in your way. They constantly ping, distract, and disrupt your team’s flow, so you spend your days switching between apps and tracking down feedback. It’s busywork, not the meaningful stuff. We want to change this.”
“We believe there’s a more enlightened way to work. Dropbox helps people be organized, stay focused, and get in sync with their teams.”
The company not only provides secure storage solutions, but also collaboration tools to help teams get more done. The hope was that Covid-19 would accelerate Dropbox’s business in a significant manner. It did accelerate, but not in dramatic fashion.
2020 revenue climbed 15% year over year, while annual recurring revenue topped $2 billion. Additionally, the company logged free cash flow nearing $500 million. That’s incredibly impressive, given the company’s revenue of $1.91 billion.
However, we run into a problem when it comes to growth. Therein also lies an opportunity, though.
For 2021 through 2023, analysts expect revenue growth of 10.1%, 8.9% and 7.3%, respectively. Three straight years of declining revenue growth from 2020 isn’t exactly a great sign. On the plus side, margins are expanding, as consensus estimates call for almost 40% earnings growth this year and 12.5% growth in 2022.
So where’s the opportunity? While this is a slower growth mid-cap tech stock, DBX stock trades at a very reasonable valuation. Shares trade at just 20 times this year’s earnings and just five times this year’s revenue. Keep in mind, Dropbox was one of the fastest SaaS companies to reach $1 billion in revenue.
While its growth is slow, it’s also steady. And Dropbox operates in two attractive markets: the cloud and data. Both end markets continue to expand and it’s hard to imagine those trends reversing anytime soon.
Bottom Line on DBX Stock
So how do we get to a potential 50% gain here?
Simply put, a 65% rally would send DBX stock to the all-time high from June 2018. If we map it back to the stock’s highest weekly close, it would represent a roughly 52% gain.
That may seem somewhat arbitrary, but that doesn’t mean that Dropbox can’t get back toward these levels. After all, the stock has already been to these areas before. The company has been doing fine from an operational standpoint, but M&A rumors have stirred the pot as well.
In reality, it’s hard to have a stock trading at just five times sales and with a $10.5 billion market capitalization that has $2 billion in annual recurring revenue and $500 million annual free cash flow, with both figures expanding.
That’s simply too attractive of a “add-on” acquisition for a mega-cap tech stock. A large company like this can scoop up Dropbox without putting so much as a dent in its balance sheet, effectively buying half-a-billion dollars in annual free cash flow.
It’s either that or Dropbox continues to slowly but surely grow from here. Either way it should benefit patient investors.
In regards to the technicals, $27.50 to $28 is clearly acting as resistance. Above that could launch the stock above $30. An acquisition could easily propel DBX stock to (or above) its prior highs. On a dip, I like the stock near uptrend support (blue line) and its 21-week moving average.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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