The dynamic technology sector thrived in an economy characterized by increasing digitization. However, stubborn decades-high inflation and aggressive interest rate hikes by an equally resolute Federal Reserve hit the industry hard.
With the money which financed its purple patch no longer virtually free, growth at all costs made way for profitability and survival as priorities for the technology sector. As firms were left scrambling to tighten their belts in the new macroeconomic reality, the workforce onboarded to make the most of the good times that showed no signs of ending was the first to be jettisoned.
According to a report by the outplacement services firm Challenger, Gray & Christmas, the technology industry led job cuts in 2022, totaling more than 97,000 announced across the sector, up 649% from the nearly 13,000 tech jobs that were cut in 2021.
However, global content collaboration platform provider Dropbox, Inc. (DBX) differentiated itself by balancing profitability with growth. Over the past three years, DBX’s revenue has grown at a 12.9% CAGR. During the same period, the company also registered EBITDA and total assets growth at 77.3% and 2.8% CAGRs, respectively.
The platform allows users to create, access, organize, share, and secure content by signing up for free through its website or app, with the option of upgrading to a premium subscription for paid features. The company has a diverse clientele from professional services, technology, media, education, industrial, consumer and retail, and financial services industries.
The stock has gained 5.2% over the past month to close the last trading session at $23.39.
Let’s closely examine the factors that make it worthy of investment.
Solid Financials and Optimistic Analyst Estimates
For the fiscal 2022 third quarter ended September 30, 2022, DBX’s revenue increased 7.4% year-over-year to $591 million, while its gross profit grew 9.8% from the prior year to $481.30 million.
During the same period, the company’s non-GAAP operating income increased 16% year-over-year to $186.7 million, while its non-GAAP net income and EPS increased 4.1% and 16.2% year-over-year to $153.1 million and $0.43 per share, respectively.
Analysts expect DBX’s revenue and EPS for the fiscal year ended December 2022 to come in at $2.32 billion and $1.57, representing increases of 7.5% and 1.9% year-over-year, respectively. Revenue and EPS are expected to grow 5.2% and 10% during the current fiscal to $2.44 billion and $1.73, respectively.
Attractive Valuation
In terms of its forward P/E, DBX is trading at 14.90x, 26 lower than the industry average of 20.14x. The stock’s forward EV/EBITDA multiple of 10.53 is 21.7% lower than the industry average of 13.45.
Moreover, DBX’s forward Price/Cash Flow multiple of 10.78 is 41.6% lower than the industry average of 18.47.
Excellent Capital Allocation by Management
DBX’s trailing-12-month gross profit margin of 80.62% is 63.3% higher than the industry average of 49.37%. The company’s trailing-12-month EBITDA and net income margins of 22.57% and 15.25% also compare favorably to the industry averages of 11.22% and 3.22%, respectively.
Similarly, DBX’s trailing-12-month ROTC and ROTA of 11.13% and 12.93% also exceed the respective industry averages of 3.05% and 1.47%.
POWR Ratings Reflect Promising Prospects
DBX’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. DBX has an A grade for Quality, consistent with its impressive profitability.
Also, DBX’s attractive valuation earned it a B grade for Value. It ranks #11 of 79 stocks in the Technology - Services industry.
Click here to see the additional POWR Ratings for DBX’s Growth, Stability, Sentiment, and Momentum.
Bottom Line
While most tech majors have provided bleak guidance for 2023, DBX Co-Founder and Chief Executive Officer Drew Houston was “excited about our progress innovating around new products and driving multi-product adoption, including the release of Capture to all Dropbox users and the introduction of the rebranded Dropbox Sign.”
Consistent with the optimism, on December 16, DBX announced that it had acquired FormSwift, a cloud-based service that gives individuals and businesses a simple solution to create, complete, edit, and saves critical business forms and agreements.
DBX believes the acquisition would become a strong addition to its document workflows product suite. As a result, the company could bring more value to its customers by offering them a template library and a simple solution to create, complete, edit, and save critical business forms and agreements.
In addition, robust financials, capital discipline, and attractive valuations make DBX an attractive investment option for solid risk-adjusted returns.
How Does Dropbox, Inc. (DBX) Stack up Against Its Peers?
In addition to DBX, which has an overall POWR Rating of B, investors could also consider looking at its A-rated industry peers: Jabil Inc. (JBL), Celestica Inc. (CLS), and Issuer Direct Corporation (ISDR).
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DBX shares fell $0.37 (-1.58%) in premarket trading Monday. Year-to-date, DBX has gained 2.86%, versus a 5.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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