Dropbox (DBX) will report second quarter fiscal 2018 earnings results after the closing bell Thursday, marking its second report as a public company since launching its IPO on March 23.
For the three months that ended June, the San Francisco-based company is expected to earn 6 cents per share on revenue of $331.4 million. For the full year, ending in December, earnings are projected to be 28 cents per share, while full-year revenue is seen rising to $1.36 billion.
Despite the fact that the company, which competes with products from Microsoft (MSFT), Amazon (AMZN) and Google (GOOG , GOOGL), is already profitable, valuation concerns have emerged. The stock — currently trading around $31 — has soared 50% above its $21 IPO price is currently trading at 112 times fiscal 2018 earnings-per-share estimates, which is times that of the S&P 500 index. It’s for this reason the shares have sold off more than 15% over the past couple of weeks. In other words, Dropbox has quite a bit to prove on Thursday.
Founded in 2007, the cloud storage company has quickly asserted itself as a leader within the fast-growing industry, specializing in storage and sharing of documents, photos and files. Dropbox, which makes money by selling cloud subscriptions to its product, delivered a beat on both the top and bottom lines in the first quarter, reporting 8 cents per share on $316.30 in revenue.
But here’s the thing: With over 500 million registered users, spanning 180 countries, only about 2% of those users are paying for the service. On Thursday the company must demonstrate that “its strength in numbers” can translate to long-term profitability. But not everyone is worried.
Jefferies analyst John DiFucci, citing the company’s growth capabilities, upgraded Dropbox from Hold to Buy and reiterated his $32 price target for the stock. DiFucci believes the company’s free cash flow position is being underestimated, particularly when compared to its software-as-a-service peers (SaaS). He noted Dropbox has a 29% free cash flow margin versus the industry SaaS average of 11%.
Beyond the top- and bottom-line numbers, analysts on Thursday will also focus on metrics such as the company’s average revenue per user (ARPU). In that regard, DiFucci sees ARPU also jumping in the quarters ahead in what he calls significant "pricing uplifts,” which will be driven by the company’s new subscription services launched last year and benefiting the share price.
It remains to be seen whether Dropbox can live up to such lofty expectations. But its encouraging that the young company, along with Google, currently hold the top two spots in the cloud storage industry. Add the fact that Dropbox is already profitable and growing its user base puts it in a compelling position in terms of competition. And to the extent the company can scale its addressable market, while diversifying its products, Dropbox will be a strong M&A candidate for one of the aforementioned cloud giants.