Is it time to buy Dropbox stock?

2021 was another good year for the file sharing and content collaboration company drop box (NASDAQ: DBX)which released its fourth quarter results on February 17.

But despite the positive results, Dropbox’s stock remains stable over the past year and just slightly above its Initial Public Offering prices from four years ago. Let’s see if Dropbox could offer good value to investors today.

Image source: Getty Images.

Steady profit growth

It’s no secret that Dropbox faces fierce competition in the content collaboration industry. Companies like Alphabet with its Google Drive product and Microsoft with its OneDrive service are able to offer significant discounts and attractive packages to potential customers. Yet, in the face of these substitutes, Dropbox’s 2021 results demonstrated continued growth across the board.

Starting with its number of customers, the company added approximately 1.3 million new paid users during the year to reach a total number of 16.8 million, an increase of 8.5%. But it’s not just new users driving growth. Emerging trends among Dropbox’s current user base also look promising. Average revenue per user grew 4.1% in 2021, while churn improved quarterly throughout the year.

To add to Dropbox’s revenue strength, the company was also able to increase profit margins through several cost improvements. Adjusted gross margin increased 140 basis points to 80.8% for the year driven by “material efficiencies” and its free movement of capital margin decreased from 25.6% to 32.8% for 2021 due to lower overall operating expenses.

Build the digital office

Not all of Dropbox’s improvements this year show up in its financials.

The company has also added several enhancements to its platform that should help its customers work more efficiently in a digital environment. Whether it’s rebuilding its mobile experience, better screenshot and editing tools, or easier onboarding for new team members, Dropbox is making several much-needed changes to minimize friction for its users.

But it’s also taking much bigger steps to help its customers through acquisitions. During the year, Dropbox closed its deals with DocSend and Command E, both of which should bring tons of added value to customers. DocSend is a secure file sharing and analytics platform that helps users control who can access their documents and provides real-time feedback and analytics on those shared documents. Command E, on the other hand, is a universal search tool that helps users easily find and organize all of their cloud content.

So whether through small iterations of the platform or added features through acquisitions, Dropbox continues to invest in remote collaboration and workflow. CEO Drew Houston even reiterated his confidence in the industry on the company last call on earnings when he said “[I]It’s clear to us that the shift from working primarily in physical offices to working primarily on digital screens is permanent.”

Evaluation

Despite what most investors would probably consider a strong year, Dropbox’s stock performance was rather disappointing. This disconnect between trading results and market returns has resulted in an attractive valuation.

Today, Dropbox trades at an enterprise value (market cap minus net cash) of approximately $8 billion, and over the past 12 months the company has generated $708 million in free cash flow, valuing the business at a value to free cash flow ratio. ratio of around 11 times – well below the market average.

To capitalize on this low valuation, the board of directors of Dropbox has just authorized an investment of 1.2 billion dollars share buyback program in addition to the remaining $344 million on its existing program. Assuming both programs are fully exhausted, Dropbox could repurchase approximately 19% of its total outstanding shares at current prices, which would significantly increase the company’s free cash flow per share.

If Dropbox is able to meet its goal of $1 billion in free cash flow by 2024 — a 41% increase from its 2021 figure — and the company maximizes its stock buyback program , Dropbox is expected to deliver exceptional returns to investors in the future.

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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Ryan Henderson has no position in the stocks mentioned. The Motley Fool owns and recommends Alphabet (A shares) and Microsoft. The Motley Fool recommends Alphabet (C-shares). The Motley Fool has a disclosure policy.

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