This Tech Stock Deserves a Serious Look
In a plunging market, a lot of stocks seem to be on sale. In particular, tech stocks used to be highly sought after but have taken some of the hardest hits in the recent round of sell-offs. As a result, the discounts on tech stocks can look pretty attractive.
But keep in mind that the bearish sentiment could stay for a while. With the World Health Organization declaring the coronavirus outbreak a pandemic, and with Saudi Arabia causing oil prices to plunge, there is plenty of uncertainty.
Still, there are tech companies that are well positioned to keep thriving, even in the current environment. Dropbox Inc (NASDAQ:DBX) serves as a good example.
Headquartered in San Francisco, Dropbox is a business software company. It started back in 2007 as a cloud storage service provider, helping users back up and share their files. Today, Dropbox offers a global collaboration platform that’s used in about 180 countries.
And even though Dropbox is not exactly a tech giant like Apple Inc. (NASDAQ:AAPL) or Alphabet Inc (NASDAQ:GOOG), it does have a rather substantial user base.
As of December 31, 2019, the company had more than 600 million registered users and 14.3 million paying users. Notably, 80% of Dropbox subscribers use the platform for work. (Source: “Company Presentation February 2020,” Dropbox Inc, last accessed March 16, 2020.)
Investors like tech stocks because they tend to run fast-growing businesses. On that front, Dropbox does not disappoint.
In the fourth quarter of 2019, Dropbox generated $446.0 million of revenue, representing a 19% increase year-over-year. Excluding the impact of exchange rate fluctuations, the company’s revenue would have been up 20%. (Source: “Dropbox Announces Fourth Quarter and Fiscal 2019 Results,” Dropbox Inc, February 20, 2020.)
As I mentioned earlier, Dropbox had 14.3 million paying users at the end of December 2019. Well, that’s up from 12.6% from the end of 2018. People are also paying more to use the company’s platform. Dropbox’s average revenue per paying user came in at $125.00 in the fourth quarter, up 4.5% from the year-ago period.
The business became more lucrative, too. In the fourth quarter , the company achieved adjusted gross margin of 77.6% and adjusted operating margin of 15.6%. To put that in perspective, DBX’s prior-year adjusted gross margin was 75.7% and its adjusted operating margin was 11.0%.
At the bottom line, Dropbox Inc earned adjusted net income of $67.4 million in the fourth quarter of 2019, up 59.3% year-over-year. The company also grew its free cash flow by a whopping 82.7% year-over-year to $161.3 million for the quarter.
In fact, Dropbox’s business has been firing on all cylinders for quite a while. The chart below shows the company’s revenue in each of the last three years.
Dropbox Inc Revenue ($Millions)
(Source: “Company Presentation February 2020,” Dropbox Inc, op. cit.)
Mind you, the top-line number is not the only thing that’s been trending up. Over the past three years, Dropbox also managed to grow its adjusted operating income from $60.0 to $205.0 million. That’s a total increase of 242%!
And that growth momentum is expected to continue. Chief Financial Officer Ajay Vashee said the following in Dropbox Inc’s latest earnings conference call:
For the first quarter of 2020, we expect revenue to be in the range of $452 million to $454 million or 17% to 18% year-over-year growth. On a constant currency basis relative to the average rates across Q1 of 2019 we anticipate year-over-year growth to be approximately 18% to 19%. We expect non-GAAP operating margin to be in the range of 13.5% to 14% and diluted weighted average shares outstanding to be in the range of $418 million to $423 million based on our trailing 30-day average share price.
(Source: “Dropbox, Inc.’s (DBX) CEO Drew Houston on Q4 2019 Results – Earnings Call Transcript,” Seeking Alpha, February 20, 2020.)
Why Dropbox Inc Could Be an Opportunity
So we know that Dropbox looks rock-solid on the growth front. But what about the coronavirus outbreak, which has been causing almost every stock to drop to the floor?
Well, that’s exactly where Dropbox Inc’s smart workspace business could come to the rescue. You see, even though the company started as a cloud storage service, it now offers a global collaboration platform that incorporates content management, collaborative apps, professional sharing, project management, and document workflow.
In other words, if more people have to work from home due to the coronavirus outbreak, it could lead to increased usage of Dropbox’s services.
Over the past few weeks, Dropbox stock has tumbled, which shouldn’t come as a surprise, given how much the broader market has plunged due to the coronavirus and falling oil prices.
But because of Dropbox Inc’s rock-solid business, investors of DBX stock can still expect to be rewarded in the long term.