Despite reporting strong quarterly financial numbers, along with beat-and-raise results, shares of Dropbox (DBX) remains under pressure amid the rotation out of growth tech stocks with high valuations. But the risk versus reward profile has improved drastically with the stock now trading at just three times fiscal 2023 revenue with a forward P/E of 13.
But are these two valuation metrics enticing enough to get investors to hop on and remain patient if and when the market rotates back into growth? That’s the main question investors will be focusing on when cloud storage company announces its first quarter fiscal 2022 earnings results after the closing bell Thursday. Dropbox stock has fallen 30% in the past six months and is down 11% year to date. Notably, on a year-to-date basis, it has outperformed the 12.5% decline of the S&P 500 index. And that’s due to the consistency in execution is has demonstrated.
Dropbox makes money by selling cloud subscriptions and office collaboration products. Even with its strong operating performance, which includes top- and bottom-line beats in ten straight quarter, the market has raised concerns whether Dropbox can compete with larger competitors — namely Microsoft (MSFT), Amazon (AMZN) and Google (GOOG , GOOGL). It's also overlooked that the company is highly profitable. For any of this to matter, investors on Thursday will want a top- and bottom-line beat, and for Dropbox to demonstrate it can continue to grow its user base in the face of stiff competition.
For the three months that ended March, the San Francisco-based company is expected to earn 37 cents per share on revenue of $558.95 million. This compares to the year-ago quarter when earnings were 35 cents per share on revenue of $505.18 million. For the full year, ending December, earnings are projected to be $1.60 per share, up from $1.54 a year ago, while full-year revenue of $2.33 billion would rise 7.8% year over year.
Since its inception, the company’s subscription business model has evolved to offer additional services to both corporate users and individual customers. With its free service, the company is able to convert users to paid subscribers by offering numerous upgrade options for user who are prefer more advanced tools. This strategy has been effective in enticing new customers away from its larger rivals, along with ways to monetize its users to sustain long-term profitability.
What’s more, as a way to drive higher average revenue per user, the company has expanded the paid conversion penetration, in addition to deploying its strong free cash flow to driver growth investments. For Dropbox, these various initiatives have driven recurring revenue to account or 90% of total revenue which makes revenue forecasting much more predictive. In Q4, revenue of $565.5 million rose 13% year over year, topping Street estimates by $7 million, while adjusted EPS of 41 cents per share beat by 5 cents.
Just as impressive, adjusted operating margin, now standing at 29.3%, improved 600 basis points from the year-ago quarter. During the quarter, total annual recurring revenue ended reached $2.3 billion, rising by of $43.1 million sequentially and an up 12% year over year. Just as impressive, paying users ended at 16.79 million, up 8.5% year over year, compared to 15.48 million for the same period last year.
All told, these figures, and the company’s ability to increase its ARPU suggests Dropbox has pricing power, and it not under the perceived competitive pressures that has been feared. These, among other things, will be the main trends investors will focus on during Thursday's conference call with analysts.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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