The past six months have been a windfall for Dropbox’s shareholders. The company’s stock price has jumped 45.7%, hitting $35.50 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Dropbox, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Dropbox Will Underperform?
Despite the momentum, we’re passing on Dropbox for now. Here are three reasons why DBX doesn’t excite us, plus one stock we’d rather own.
1. Billings Hit a Plateau
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.
Over the last year, Dropbox failed to grow its billings, which came in at $633.5 million in the latest quarter. 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 4.5% annualized growth for the past five years. This projection doesn’t excite us and indicates its newer products and services will not lead to better top-line performance yet.
3. Operating Margin Rising, Profits Up
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses — everything from the cost of goods sold to sales and R&D.
Looking at the trend in its profitability, Dropbox’s operating margin rose by 4.2 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 26.6%.
Final Judgment
Dropbox falls short of our quality standards. Following the recent surge, the stock trades at 3.3× forward price-to-sales (or $35.50 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.
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