Over the past six months, Dropbox’s stock price fell to $23.82. Shareholders have lost 16.1% of their capital, which is disappointing considering the S&P 500 has climbed by 5.1%. This may have investors wondering how to approach the situation.
Is now the time to buy Dropbox, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Dropbox Will Underperform?
Despite the more favorable entry price, we're swiping left on Dropbox for now. Here are three reasons there are better opportunities than DBX and a stock we'd rather own.
1. Declining Billings Reflect Product and Sales Weakness
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Dropbox’s billings came in at $625.3 million in Q4, and it averaged 1.1% year-on-year declines over the last four quarters. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation. 
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Dropbox’s revenue to stall, close to its 5.7% annualized growth for the past five years. This projection is underwhelming and suggests its newer products and services will not accelerate its top-line performance yet.
3. Operating Margin Rising, Profits Up
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Analyzing the trend in its profitability, Dropbox’s operating margin rose by 8.3 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 27.3%.
Final Judgment
We see the value of companies addressing major business pain points, but in the case of Dropbox, we’re out. Following the recent decline, the stock trades at 2.3× forward price-to-sales (or $23.82 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
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