Dropbox Just Jumped After Q2 Earnings: Should You Buy the Stock?

Dropbox (NASDAQ:DBX), the file storage and work collaboration hub, just announced results for the second quarter of 2021. Profit margins and cash generation were better than investors expected, and the company raised its free cash flow guidance for the full year. This led the stock to rise in the days following the report, and Dropbox stock is now up almost 50% so far in 2021.

With the business gaining momentum, is now the time to buy some shares of Dropbox? Let’s take a look.

A blue cloud leaning against a laptop.

Image source: Getty Images.

Solid results

Dropbox’s revenue grew 13.5% year over year in Q2 to $530.6 million, and annual recurring revenue hit $2.16 billion by the end of the period. Paying users also grew at a solid rate, hitting 16.14 million compared to 14.96 million a year ago. Some of this can be attributed to Dropbox’s recent acquisition of DocSend, which closed in March, but either way, paying users grew nicely in the period.

Dropbox also flexed its profit muscles in Q2. Adjusted operating margin hit 31.9%, up from 20% a year ago, leading free cash flow to hit $216 million in the period. This led management to raise the company’s full-year free cash flow guidance from $670 million-$690 million to $710 million-$730 million. Based on its current market cap of around $13 billion, Dropbox trades at a forward price-to-free cash flow (P/FCF) of 18, which is well below the market average.

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Acquisitions coming along nicely

On the Q2 conference call, management gave updates on the progress of some of Dropbox’s recent acquisitions, specifically highlighting the success of HelloSign, the digital signature product that is similar to DocuSign. HelloSign signature requests were up 75% year over year in Q2, showing the strong adoption the product is getting, even as the company lapped the Q2 2020 lockdowns. HelloSign is increasingly getting integrated into Dropbox subscriptions, which will hopefully enhance the value proposition of being a paying Dropbox user.

Dropbox didn’t give any specific numbers on its DocSend acquisition outside of saying the segment “exceeded our internal goals and milestones” for the period. If the HelloSign success is any indication, upselling existing paying users can be a great strategy for Dropbox to grow DocSend usage over the next few years or convince free users to cross the bridge and become paying Dropbox subscribers.

Increased spending

Dropbox has a goal of getting to $1 billion in annual free cash flow and 30% operating margins by 2024. Right now, it looks like it has even surprised itself with how profitable the business has become, already getting to 30% operating margins and raising its full-year free cash flow guidance in Q2. This success has led Dropbox to put its foot on the gas and start reinvesting for more growth.

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On the conference call, management said it will be accelerating hiring for product development, exploring new growth initiatives, and looking at inorganic ways (i.e., acquisitions) to grow the company. This can be a double-edged sword, as growing employees just because you can is not necessarily a good thing, but as long as Dropbox continues growing revenue while maintaining strong free cash flow margins, there’s no reason for investors to fret over some small increases in spending. 

Time to buy?

If you’re a prospective investor in Dropbox, it may look like you’ve missed the boat with shares up so much in 2021. But with the company well on track to hit its 2024 free cash flow target of $1 billion, a market cap of $13 billion still looks cheap, at least relative to most other stocks out there.

This isn’t a hypergrowth software company, but Dropbox continues to impress with its profit numbers, and there’s plenty of room for this business to grow over the next few years and beyond. If you’re looking to invest in the tech sector but want to stray away from overvalued companies, Dropbox still looks like a great fit for your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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View more information: https://www.fool.com/investing/2021/08/14/dropbox-just-jumped-after-q2-earnings-should-you-b/

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