When Will Dropbox Become Profitable?

Dropbox is making headlines with its recent S-1 filing, and investors and analysts are taking a closer look at what the company's metrics say about its long-term growth potential.

In this Industry Focus: Tech clip, host Dylan Lewis and Motley Fool contributor Evan Niu go over Dropbox's revenue and gross margin in the last few years, and explain how the cloud company is paving the way to net profitability in the near future.

A full transcript follows the video.

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This video was recorded on March 2, 2018.

Dylan Lewis: Looking at how all of these things work their way into the company financials, in 2017, the company posted $1.1 billion in revenue, which was good for 31% year-over-year growth, down a little bit from the 39% growth the company posted in 2016. But the top line is moving along there. I think looking at all the numbers on their income statement, the thing that is most encouraging to me is the huge expansion that they're seeing in their gross margins. Evan, we saw them go from 33% in 2015 to 67% in 2017.

Evan Niu: And the real driver of that is Dropbox pursuing their own infrastructure. In the early days, Dropbox, like many other internet companies, relied heavily on Amazon Web Services to do all the back-end cloud infrastructure and hosting. But starting in about 2013, Dropbox got to this scale at which point they were like, it makes financial sense for us to do this ourselves. So, they kicked off this infrastructure optimization project back then, this was, again, 2013. It took them about 2.5 years to complete. Basically, they're built up their own infrastructure, it's all custom built, and they migrated all of that information data from AWS onto their own infrastructure. And that took many years, hundreds of millions of dollars of capital expenditures. It's a huge initiative, but ultimately it pays off.

They completed the transition at the end of 2016, and what you see is, immediately, capital expenditures fall off a cliff because they were spending very heavily to build their infrastructure. Once it's mostly done, you don't have to spend that money anymore. Then your margins start to really grow as you're scaling, as you're leveraging the economies of scale here. So, that's a huge part of it. They still use AWS to a smaller degree, but at this point, about 90% of all user data is held on their own servers and infrastructure.

Lewis: Looking at the bottom line now, Dropbox lost $115 million in 2017, though losses are narrowing there. In 2015, losses were over $300 million. I see this as a business that's not profitable now, but given the gross margin expansion and the infrastructure strategy they've chosen, I could see them being profitable in the near-term future. I don't think this is a company that's going to be losing money forever.

Niu: They definitely have the potential, particularly because that infrastructure piece is huge -- it's hard to overstate how important that is financially for a company like this. They're doing all the right moves on the cost side. I definitely think, as they continue to scale, there's some definite light at the end of the tunnel.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dylan Lewis owns shares of Amazon. Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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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