Is Dropbox stock a buy right now?

Dropbox (Dropbox Stock Quote, Chart, News NASDAQ:DBX) is one tech stock you might think should be doing well this year and isn’t, but that doesn’t mean it’s not worth a look. So says Ross Healy of MacNicol & Associates Asset Management, who thinks the indicators are pointing in the right direction.

“I can’t find much wrong with this stock but then I can’t find all that much that’s really right. The current trailing price/earnings ratio is 100 but the estimated the P/E ratio for the next 12 months is 20, so the earnings trend may well be your friend as long as this persists,” said Healy, speaking on BNN Bloomberg on Wednesday

“The price-to-book ratio is 8x so it isn’t exactly cheap, but for a hyper-growth stock this could be considered to be reasonable value and it’s ‘only’ 18 per cent overvalued according to our intrinsic value measure,” Healy said. “Anyway, it looks a heck of a lot better than Zoom.”

“Technically speaking, the $17-$17.50 price level should hold, or the stock we would consider to break down and the shares could be heading lower,” Healy said.

“However, given the value that I see in Dropbox I might even buy a little bit there, if it gets there, because that level held the time (8x book value) and had a nice rebound. We might be looking at a nice little trade here,” he said.

Dropbox is pretty much even for 2020 so far, which is saying a lot considering its ups and downs of late. The stock had more or less been on a slide since its IPO in 2018 until an earnings report this February showed the company posting its first quarterly profit since going public.

But while the good news did boost DBX temporarily, the timing of the fourth quarter 2019 report seemed unlucky, as it came just as the market was waking up to the reality of COVID-19. From there, DBX took a tumble, rallied and then started to fade once again.

Even healthy results in its latest quarter, the company’s Q3, delivered earlier this month, doesn’t seem to have changed opinions. Dropbox posted revenue up 14 per cent year-over-year to $487.4 million and EPS of $0.26 per share, which beat analysts’ consensus estimates at $484 million and $0.19 per share. (All figures in US dollars.)

“We saw momentum across the business with strong operating income, profitability, and free cash flow,” said Dropbox co-founder and CEO Drew Houston, in a press release. “Our margin expansion demonstrates the strength of our business model and execution against our long-term targets. We believe the opportunity to redesign work has never been bigger, and now, as a Virtual First company, we’ll truly live our mission as we build better products for distributed teams.”

With the accelerated shift to work-from-home brought about by the pandemic, logic might dictate that a cloud storage service provider like Dropbox would do well, both financially and in terms of share price. Dropbox is no newcomer to the data storage market, having been around for more than a decade, and neither is its piece of the pie that small. Dropbox has about 21 per cent of the cloud storage market, according to Datanyze, versus Google at about 34 per cent and Microsoft OneDrive at 12 per cent.

What’s more, Dropbox has guided for more growth up ahead, calling for Q4 revenue to increase by between 11 and 12 per cent year-over-year for full 2020 revenue between $1.907 and $1.909 billion, up from earlier guidance of between $1.891 billion and $1.901 billion. Although not yet providing guidance on 2021, management has suggested that they’re investing with a mind to double-digit revenue growth.

“Our continued growth in ARR reflects our strategy to attract new paying users, drive users to our premium plans and improve retention. We ended Q3 with 15.25 million paying users, adding over 290,000 net new paying users in the quarter. ARPU was $128.03,” said CFO Tim Regan in the third quarter earnings call.

“We will continue to invest in revenue growth, improve our operating margins, aim to deliver $1 billion of free cash flow in 2024, and allocate capital to high-ROI initiatives. While it is early in the journey, we made good progress on these goals in this most recent quarter, and we remain on the path of delivering against our long-term targets,” Regan said.

Analyst Alex Zukin of RBC Capital stayed bullish on Dropbox after the Q3 earnings, with the analyst maintaining his “Buy” rating in an update to clients while putting a price target of $25 per share. At press time, that represented a projected 12-month return of 33 per cent.

For another perspective, however, Monness analyst Brian White stuck with his “Hold” rating after the quarterly numbers, saying Dropbox is “still searching for a compelling narrative that captures the imagination of the investment community.”