Dropbox (NASDAQ: DBX ) went public in March 2018 with an IPO price of $21 per share and an opening price of $29. Despite significant financial advances, it is currently worth $20.65 after four years. This is because it went public at a relatively high valuation, and it took four years for its fundamentals to catch up with the actual price.
Dropbox's business plan is based on the freemium model, in which the service is primarily free, but customers can pay for additional capabilities. Most of Dropbox's 700 million+ customers use the service for free, but 17 million have signed up for one of the paid options, which is good news for the company. As a result, the number of paying users is an important measure that has been increasing. There were 14.3 million in 2019; therefore, the company has grown by a few million since its IPO. The average revenue per paying user has also increased somewhat, from around $133 in 2019 to about $133. When we multiply the two, we obtain annual recurring revenue, which is currently just over $2.2 billion.
Despite providing free service to most of its users, the company has achieved excellent financial results, including a >80% non-GAAP gross margin, >30% non-GAAP operating margin, and $1 billion in free cash flow. They have set their goals for 2024. GAAP operating margins are relatively low, primarily attributable to share-based compensation, as is the case with many technological companies. On the plus side, the company has shown excellent operating leverage, with operating margins increasing dramatically while revenues doubled.
Although share-based compensation has decreased since the IPO, it is believed that it is still high for a company of its size.l Stock-based compensation should be deducted from free cash flow numbers to account for actual owner earnings.
After deducting $300 million in stock-based compensation, the corporation generated $708 million in free cash flow in 2021, giving us an adjusted free cash flow of close to $400 million.
In Q1 2022, the company's core financial metrics showed some, if modest, improvement. Annual recurring revenue has climbed to $2.29 billion, with an average revenue per user of $134. Revenue for the quarter was $562 million.
The company expects to increase its gross margin to 80-82 per cent and non-GAAP operating margin to 30-32 per cent in the long run. The company also expects to generate a yearly free cash flow of more than a billion dollars, up from $708 million in 2021.
About Dropbox
Dropbox is a fascinating firm that has made a success of its freemium business model. The valuation was pretty high when it went public, but it has since dropped significantly. Decelerating growth explains part of the valuation reset. Investors are warned that shares might fall even more if growth continues to decelerate under rising competitive pressures from companies like Microsoft with its OneDrive product. However, at this time, we believe that the pros and disadvantages of the stock have been reasonably well balanced and that the stock price will follow the evolving fundamentals of the firm more closely in the future.
Further information regarding Dropbox’s balance sheet, glassdoor review, stock evaluation and risk is on "Dropbox has gone from very expensive to attractively priced in its IPO".
