Home / Stocks / Dropbox Stock Has Lagged Behind Zoom Video, Slack, and Microsoft. Why It Deserves Better.

Dropbox Stock Has Lagged Behind Zoom Video, Slack, and Microsoft. Why It Deserves Better.

Dropbox stores photos, videos, and documents for some 600 million users, though more than 97% of them use it for free. Storage is generally a background service—it’s there when you need it, but rarely top of mind.

Now Dropbox is pushing its way into the foreground. The company sees an opening as workspace platforms battle for dominance. The goal is to be a neutral player where anyone can converse, exchange content, and collaborate, regardless of corporate origin or allegiance.

Dropbox Spaces, launched last fall, is a centralized workspace for organizing content, digital tools, and communications across various platforms, from Slack (WORK) to Zoom (ZM).

Microsoft and Google try to keep you in their ecosystem,” says Lev Finkelstein, vice president of finance and strategy at Dropbox. “We connect to Zoom and other apps, and they’re deeply integrated into our platform.”

Like other cloud companies, Dropbox says it’s benefiting from more people staying home and working remotely. On a recent earnings call, CEO Andrew Houston said free trials have jumped 40% among business-team users since mid-March. And Dropbox is seeing an uptick in usage of its HelloSign digital signature tools, a business it acquired for $230 million last year. University professors are using Dropbox Paper, a shared workspace, to make content more accessible for students stuck at home.

The boost in interest puts Dropbox squarely in line with trends for other stocks in the stay-at-home group. But investors aren’t treating it like one. At a recent $22 a share, the stock trades at four times enterprise value to estimated 2021 sales. Zoom Video, perhaps the hottest digital-work stock, fetches 46 times EV to sales. Slack goes for 18 times, and
Atlassian
(TEAM), which owns project-management tool Trello, trades at 20 times.

RBC analyst Alex Zukin notes that at just six times EV to next year’s sales, Dropbox stock would be valued at $30, a 36% premium to a recent close.

Dropbox isn’t growing nearly as fast as some of the other stay-at-home standouts, but it’s a profitable business with recurring revenue. Sales rose 19% in 2019 to $1.7 billion, fueled by an additional 1.6 million paying customers.

More important, though, Dropbox is becoming an increasingly profitable business. Adjusted operating margins last year were 12%; the company’s long-term target is 28% to 30%. Net income is forecast to rise 48% this year, to $306 million or 73 cents a share, and 20% next year. “They’ve shifted from a high-growth company to one that’s growing efficiently at scale, and more profitably than a lot of other companies,” says Zukin, who has an Outperform rating on the stock.

To be sure, investors have their reasons for overlooking Dropbox. Revenue growth has been sliding since the company went public in 2018, going from 26% that year to an estimated 14% in 2020. Dropbox is fundamentally still a digital repository, and while it has added premium features and functionality, it faces pricing pressure from rivals offering free or lower-cost storage. “When you compete against Microsoft, Google, and Apple, there’s a sense of ‘Why do these guys even exist?’ ” says William Blair analyst Jason Ader.

Ader still rates the stock at Outperform, and the answer to his question is that small and midsize businesses, freelancers, and other “knowledge workers” still rely on Dropbox, giving the company a large opportunity to sell new services.

While a basic Dropbox storage plan is free, business users pay for premium features and additional storage capacity. The company’s average revenue per user, or ARPU, has climbed from $112 in 2017 to $123 in 2019. Analysts expect ARPU to reach $128 this year and $133 in 2021.

Dropbox’s Spaces platform is the big, unappreciated opportunity. Spaces integrates other corporate software into its interface, creating a shared workspace in which users can switch apps without leaving the Dropbox zone—accessing video from Zoom, messages from Slack, and content created with tools like Adobe Acrobat, Microsoft Office, or Google‘s G Suite.

While those firms are trying to create a walled garden around their ecosystem, Dropbox is going in the opposite direction, prioritizing users’ content, regardless of platform. Dropbox mainly uses its own cloud platform, rather than an outside provider like Amazon Web Services, giving the company more control over pricing and technology.

“There’s a stickiness to Spaces that’s underappreciated by the investment community,” William Blair’s Ader says. Dropbox managed to raise prices on subscription renewals by 20% last year,

By now, investors have largely priced in our work-from-home reality. Dropbox could be a rare opportunity to still profit from the trend.

Write to Daren Fonda at daren.fonda@barrons.com

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