Dropbox (NASDAQ: DBX) was a darling of Silicon Valley. Founded in 2007, the company skyrocketed to $ 4 billion in 2011, propelled by scorching user growth. Then, after its IPO in 2018 at a price of $ 21 per share and with a market capitalization of over $ 8 billion, it failed to meet investors’ expectations. The stock is down about 15% from its closing price on its first day of trading, in S&P 500 during this period.
However, while Dropbox has disappointed investors so far, if you look at its financials, the company has actually improved significantly since going public. After releasing its first quarter results, the company is once again showing why it is the ultimate technology value stock.
First quarter results
In its latest report, Dropbox generated $ 511.6 million in revenue, up 12% year-over-year, as it strives to continue selling its paid tools from cloud management and file sharing to hundreds of millions of customers using its free product.
Paid users reached 15.83 million in the quarter, up from 14.59 million the year before, while average revenue per user (ARPU) rose 5% to $ 132.55. All of this led Dropbox to increase its top annual recurring revenue (ARR) by 13% to $ 2.11 billion.
In summary, Dropbox generated $ 108.8 million in free cash flow during the period, more than four times the $ 25.5 million generated last year. Free cash flow is a better indicator than net income for evaluating Dropbox’s profitability because it needs to carry revenue over the term of customer contracts. Currently, it has $ 641 million of deferred income on its balance sheet, which will not be reflected in the income statement, resulting in GAAP net income only reaching $ 47.6 million. during the quarter.
Investors should expect Dropbox to steadily increase its free cash flow based on customer growth and sales, a sign that the business can achieve stable profitability at scale.
One of Dropbox’s biggest initiatives outside of improving its workflow management offering is acquiring new products and businesses. He acquired Hellosign, a software tool similar to DocuSign, in 2019 for $ 230 million.
The goal is to integrate Hellosign into Dropbox and sell the product to the more than 15 million paid Dropbox users, making it easy for them to send digital contracts through a single platform. According to management, signature requests on Hellosign have increased by 70% from 2019 to 2020, indicating that so far, Dropbox has been successful in selling the product to existing users.
Most recently, Dropbox acquired Docsend on March 22 for $ 165 million in cash. The software tool helps investment firms, sales and marketing teams, and investor relations teams secure documents after passing them on to a third party. Docsend’s core offering provides document senders with tools to analyze who viewed which documents and at what time.
Time will tell if Dropbox can integrate Docsend into its platform as well as with Hellosign, but at first glance it looks like the product will fit right into the ecosystem. This should make Docsend an easy cross-sell to existing users.
Repayment of capital and cheap valuation
Dropbox’s underlying financial data and growth pipeline looks strong, but investors should also look at its return on capital strategy, especially with share buybacks. Dropbox had an old $ 600 million buyback program which it exhausted this winter and has now authorized a new $ 1 billion program in conjunction with a convertible debt offering that raised $ 1.3 billion. of liquidity in February. Management has also raised its free cash flow forecast for 2021 to $ 680 million (at midpoint), which should also help the company fund these buybacks.
With a market cap of $ 9.55 billion, $ 1 billion or more in repurchases of shares can dramatically reduce the number of shares in Dropbox, causing the stock’s valuation to drop. At the end of the first quarter, Dropbox’s share count stood at 389.8 million, down 6% from a year earlier as management aggressively returned capital to shareholders.
Dropbox is trading at a forward price to free cash flow (P / FCF) ratio of 14 based on its updated 2021 forecast. If management continues to reduce the number of shares in the company while steadily increasing the TAR and free cash flow, this valuation could become even more attractive in the years to come.
While Dropbox may not be Silicon Valley’s darling, it used to grow sales by 50% or more every year, it still looks like a perfect tech stock for value investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.