This Tech Stock Is Way Too Cheap – The Motley Fool

Dropbox (NASDAQ:DBX), the cloud storage and collaboration platform, just wrapped up a strong fiscal year. But even with the company’s rising revenue, greater profitability, and a higher customer count, its stock price was down as much as 5% following the release of its fourth-quarter earnings last week.

Despite not getting much love from Wall Street traders at the moment, there is still plenty to like with Dropbox. Let’s take a look at why this tech stock is way too cheap to pass up. 

How was 2020 for Dropbox?

Although Dropbox was once a Silicon Valley darling, market participants seem to think its best days are well behind it. Today it has a market cap of $9.2 billion, while seven years ago a private financing round valued the company at around $10 billion. Despite the negative market sentiment, Dropbox’s most recent earnings report points to a brighter future. 

Digital dollar sign

Image source: Getty Images.

Driven by increased demand thanks to remote work, Dropbox capped off the year with more than 15 million paying users, up 8% from the year prior. While growing its user base, the company also increased the spend from its existing customers by 4%. All that amounted to finishing off 2020 with $1.9 billion in revenue, a 15% increase from the year before.

Profit margins improved as well. In 2020, Dropbox generated $491 million in free cash flow (FCF), a 26% FCF margin. In comparison, its FCF margin for 2019 was only 24%. CFO Tim Regan stated that Dropbox’s goal is to reach $1 billion in free cash flow by 2024 with operating margins in the range of 28% to 30%. 

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Dropbox finds some cost savings

During the pandemic, Dropbox chose to permanently switch to remote work for most of its staff. While payroll costs might not change too much from the switch alone, the required spend for equipment and maintenance should decrease over time. 

Since this remote-work approach also means fewer employees are using the headquarters, management decided to sublease its office space. This change was also accompanied by a $398 million writedown on the fair value of its building lease. This writedown had no real impact on cash flow but meant that Dropbox was able to record a sizable GAAP net loss for the year, resulting in fewer taxes. 

In addition to the pandemic-related cost savings, it also took steps to reduce its workforce this year, announcing that 11% of the staff would be let go as the company shifted toward remote work. While layoffs are always difficult for companies to endure, they can often lead to excess cash that can be redeployed elsewhere in the business. 

With all of the cost savings, management has been left with more cash than it needs. And if a below-market valuation wasn’t intriguing enough, the Dropbox board of directors just approved a $1 billion share repurchase program. This is in addition to $600 million in planned stock repurchases it announced last year but has yet to make. While stock-based compensation will offset some of these buybacks, shareholders should still benefit from some of this excess cash flow as the share count continues to drop.

What’s next for Dropbox?

Building on a great financial year, Dropbox is also looking for new ways to grow. One of these is a new product currently in beta called Spaces. It’s an attempt to become a one-stop-shop for all things involved in remote work. With virtual workforces using so many different tools and services, Spaces is hoping to be a hub where users can go to find anything and everything.

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While Spaces was initially intended to be a new feature for the traditional Dropbox workspace, management was optimistic enough to make it a totally independent product. Dropbox currently has more than 540,000 businesses using its platform, which should help speed up adoption for Spaces since so many users are already acclimated to Dropbox. 

Management also said it expects to grow through acquisitions, like its purchase of HelloSign for $230 million in cash in early 2019. CEO Drew Houston has mentioned the success this acquisition is already generating and said the company plans investments to help make HelloSign the go-to software for e-signatures.

To wrap up 2020 Dropbox reported $491 million in free cash flow, yet only trades at a market cap of $9.3 billion or an enterprise value (market cap minus net cash) of $8.2 billion. At an enterprise value of roughly 17 times its annual cash flow, Dropbox trades at a steep discount to its cloud storage peers like Microsoft and Alphabet who both trade well above 25 times free cash flow. All in all, Dropbox is a business that’s operating well and trades at an enticing price. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


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