Dropbox trades at $31.11 per share and has stayed right on track with the overall market, gaining 14.2% over the last six months. At the same time, the S&P 500 has returned 14.9%.
Is now the time to buy Dropbox, or should you be careful about including it in 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?
We're swiping left on Dropbox for now. Here are three reasons why DBX doesn't excite us and a 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 $628.5 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. Revenue Projections Show Stormy Skies Ahead
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 drop by 2%, a decrease from its 7.1% annualized growth for the past five years. This projection is underwhelming and suggests its products and services will see some demand headwinds.
3. Shrinking Operating Margin
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 metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, Dropbox’s operating margin decreased by 4 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 22.4%.
Final Judgment
Dropbox doesn’t pass our quality test. That said, the stock currently trades at 3.5× forward price-to-sales (or $31.11 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of Dropbox
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