DDespite posting strong quarterly financial numbers, as well as rising earnings, shares of Dropbox (DBX) remain under pressure amid the rotation of growth tech stocks with lofty valuations. But the risk versus reward profile has improved significantly, with the stock now trading at just three times FY2023 revenue with a forward P/E of 13.
But are these two valuation measures attractive enough to entice investors to take the plunge and remain patient if and when the market returns to growth? That’s the main question investors will be focusing on when the cloud storage company reports its first-quarter fiscal 2022 results after the closing bell on Thursday. Dropbox’s stock has fallen 30% in the past six months and 11% since the start of the year. Notably, year-to-date, it has outperformed the 12.5% decline in the S&P 500. And that’s down to the consistency of execution it has shown.
Dropbox makes money selling cloud subscriptions and desktop collaboration products. Even with its strong operational performance, which includes up and down performance for ten consecutive quarters, the market has raised concerns about Dropbox’s ability to compete with larger competitors, namely Microsoft (MSFT), Amazon ( AMZN) and Google (GOOG, GOOGL). We also forget that the company is very profitable. For all of this to matter, investors will want a higher and lower pace on Thursday, and for Dropbox to demonstrate that it can continue to grow its user base in the face of fierce competition.
For the three months ending in March, the San Francisco-based company is expected to earn 37 cents per share on revenue of $558.95 million. That compares to the year-ago quarter where earnings were 35 cents per share on revenue of $505.18 million. For the full year, ending in December, profit should be $1.60 per share, compared to $1.54 a year ago, while annual revenue of $2.33 billion would increase 7.8% year-over-year.
Since its inception, the company’s subscription business model has evolved to offer additional services to businesses and individuals. With its free service, the company is able to convert users into paid subscribers by offering plenty of upgrade options for users who prefer more advanced tools. This strategy has been effective in attracting new customers away from its bigger rivals, as well as ways to monetize its users to maintain long-term profitability.
Additionally, in order to generate higher average revenue per user, the company has expanded the penetration of paid conversions, in addition to deploying its strong free cash flow to drive growth investments. For Dropbox, these various initiatives have generated recurring revenue to the tune of 90% of total revenue, making revenue forecasts much more predictive. In the fourth quarter, revenue of $565.5 million was up 13% year-over-year, beating Street’s estimate of $7 million, while adjusted EPS of 41 cents per share beat 5 cents.
Equally impressive, the adjusted operating margin, which now stands at 29.3%, improved by 600 basis points compared to the year-ago quarter. During the quarter, total annual recurring revenue reached $2.3 billion, up $43.1 million sequentially and up 12% year-over-year. Equally impressive, paid users finished at 16.79 million, up 8.5% year-over-year from 15.48 million for the same period last year.
Taken together, these numbers and the company’s ability to increase ARPU suggest that Dropbox has pricing power, and not under the perceived competitive pressures that have been feared. These, among other things, will be the key trends investors will focus on during Thursday’s conference call with analysts.
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