Why Dropbox Is a No Brainer Value Stock

Growth and technology stocks have struggled in the last few months. Many stocks are down 25% or more from their previous highs, which can be tough for investors to stomach. However, with depressed stock prices come incredible buying opportunities for investors with a long-term time horizon. File sharing and workflow platform Dropbox ( DBX -2.38% ) is no exception with its stock down over 25% in the past six months.

The company just reported its fourth-quarter and full-year 2021 earnings results, and management also offered financial guidance for the current year. The Feb. 17 report was solid, and management’s plan for growth and returning cash to shareholders makes the stock even more attractive with the share price so depressed. Here’s why Dropbox is a no-brainer value stock to buy right now. 

A person in a kitchen, sitting at their computer and looking at a sheet of paper.

Image source: Getty Images.

Solid Q4 earnings 

In the fourth quarter, Dropbox’s revenue grew 12.2% year over year to $565.5 million. While not in hypergrowth mode, the company has been able to steadily expand its annual recurring revenue (ARR) over the past few years. At the end of 2021, ARR stood at $2.26 billion, up 24% from the end of 2019.

Dropbox has been able to do this by steadily growing its paying users and average revenue per user (ARPU). At the end of 2021, Dropbox had 16.8 million paying customers, up from 14.3 million two years ago. ARPU was $133.73 in 2021, up from $123.07 in 2019. Again, this isn’t a rapidly growing business but one with a steadily expanding user base.

From a profitability standpoint, Dropbox generated $161.4 million of free cash flow in the fourth quarter and $707.7 million in 2021. By 2024, management expects this figure to hit $1 billion as ARR increases, and the company gains operating leverage.

Plenty of growth left

How does management plan to grow its ARR? First, investors should expect a boost from the recent acquisitions of HelloSign and DocSend. On the earnings call, management said the two subsidiaries were two of its fastest-growing businesses in 2021 as Dropbox cross-sells their products to its millions of existing customers.

Second, Dropbox continues to add new products to its workflow platform. These include a video manager called Dropbox Replay, a screen recorder called Dropbox Capture, and many other tools. If these tools add value for Dropbox subscribers, this will help the company raise prices over time without increasing churn, helping with ARPU and ARR growth over the next few years.

Third, management continues to hunt for buyout targets that can be bundled into the Dropbox subscription suite or added on as core products. In the fourth quarter, the company acquired Command E, a search tool that will be embedded into the Dropbox platform to help people more easily search for files and documents. Investors should expect these small acquisitions to continue over the next few years.

With all of these opportunities for add-on services and the rapid adoption of digital tools worldwide, there is a clear path for Dropbox to grow ARR about 10% annually for the foreseeable future. 

Cheap valuation and returning cash to shareholders 

If you only saw Dropbox’s revenue growth, you might not be excited enough to put the stock in your portfolio. But the highlight of this investment isn’t steady 10% top-line growth — it’s the combination of steady growth with a dirt-cheap valuation and a management team ready to return tons of cash to shareholders. 

Dropbox, as of this writing, has a market cap of $8.8 billion. In 2022, management is guiding for $760 million to $790 million of free cash flow. It just authorized a $1.2 billion share-repurchase program. This comes on top of the company already spending $1 billion on share repurchases in 2021.

Why are repurchases helpful? Because they can reduce the overall number of shares outstanding, thereby increasing the value of each stake for remaining shareholders. Dropbox’s shares outstanding have declined 7% over the last three years. With management planning to repurchase more stock, this downward trend should continue over the next few years as well.

DBX Shares Outstanding Chart

Data by YCharts.

If Dropbox can just hit the low end of its free-cash-flow guidance for 2022, the stock will trade at a price to free cash flow ratio of 11.4, which is cheaper than almost any other technology company right now. By 2024, management is confident it can clear $1 billion in annual free cash flow. Sprinkle on some repurchases at low prices, and the future looks bright for Dropbox shareholders. 

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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