It took long enough, but Wall Street finally seems to be appreciating Dropbox's (DBX) long-term competitiveness and profit/cash flow potential.
But to be fair here, Dropbox has presented a fairly unique story since it went public two years ago -- one that had some things in common with both consumer Internet and enterprise software peers, but didn't fit neatly into either box.
Following three months of treading water in the high teens, Dropbox rose 20% on Friday to $22.45 after beating Q4 estimates, guiding for 14% to 15% 2020 revenue growth (slightly better than expected), announcing a $600 million stock buyback and -- most importantly -- issuing very strong 2024 operating margin and free cash flow (FCF) targets.
On the earnings call, CEO Drew Houston said that Dropbox now expects to achieve (with the help of both revenue growth and subdued spending growth) a 28% to 30% non-GAAP operating margin by 2024. For comparison, Dropbox had a 12% op. margin in 2019 (14% excluding some one-time expenses), and previously had a long-term margin target of 20% to 22%.
Houston also forecast Dropbox will generate more than $1 billion in annual FCF by 2024. That compares with 2019 and 2018 FCF of $392 million and $362 million, respectively.
What makes Dropbox -- a company that has major cloud infrastructure needs and whose competition includes cloud storage/file-sharing services from tech giants -- comfortable issuing such a 4-year outlook? It arguably comes down to three things:
- Unlike companies such as Snap (SNAP) and Spotify (SPOT) , which pay cloud giants to handle their infrastructure needs, Dropbox relies on its own, highly-efficient, cloud infrastructure to host its services.
- With about 90% of its revenue coming from individuals and businesses signing up for Dropbox plans on their own, Dropbox (generally speaking) spends a much smaller percentage of its revenue on sales and marketing than software firms focused on inking large deals with enterprises.
- Though tech giants have long been undercutting it, the quality of Dropbox's services, together with the fact that its subscription plans aren't particularly expensive in the grand scheme of things, have allowed it to deliver steady subscriber growth and even exert a bit of pricing power for its relatively cheap Plus plan.
At long last, thanks to Dropbox's 2024 outlook, markets seem to be understanding how the combination of these three factors yields a company that's well-positioned to deliver both solid (though not massive) top-line growth and quite a lot of FCF over the long run. Having argued as much for a long time while Dropbox's stock remained under pressure as many richly-valued enterprise software firms posted big gains, I'll admit to feeling some satisfaction about that.
If the key lessons from Nvidia (NVDA) and Netflix's (NFLX) rebounds are to keep a sense of perspective when bad news arrives and not lose sight of long-term strengths when competitive concerns mount, perhaps the key lesson from Dropbox's Friday jump is how tech companies whose stories don't fit cleanly into an existing market narrative for an industry or sector can be mispriced. In some ways, Roku (ROKU) -- seen at first as a hardware company rather than a streaming platform/video advertising play -- also fit the bill when it traded at lower levels.
And even after Friday's big jump, Dropbox, which still trades for less than $2 above its $21 IPO price, doesn't look too expensive. The company currently sports an enterprise value (market cap minus net cash) of $8.2 billion. That's equal to a little over 4 times its 2020 billings consensus estimate and (though it's worth keeping in mind that this is a 4-year outlook) around 8 times its 2024 FCF guidance.
Throw in the impact a $600 million buyback will have on Dropbox's share count, and there are definitely worse deals out there among publicly-traded cloud/SaaS firms.