Don’t Drop Those Dropbox Shares; No-Moat Dropbox Ticks Off Fiscal 2022 With Strong Financial Results

We are maintaining our $26 fair value estimate for no-moat Dropbox as the firm checked off fiscal 2022 with a strong set of financial results, marginally above our expectations. Despite a tough macroeconomic backdrop, Dropbox’s top line continued to show resilience. We continue to have a positive view of Dropbox’s transition away from commoditized cloud storage by incorporating more content collaboration products into its arsenal. With a broader set of offerings, we believe the firm can unlock greater cross-selling opportunities along with more venues for new customers to land within Dropbox’s suite of offerings. With shares trading flat after hours, we view Dropbox as fairly valued.

Revenue for the fourth quarter clocked in at $599 million, up 6% year over year. Dropbox continued to face foreign currency headwinds, the firm’s top-line growth on a constant currency basis was around 9%. As mentioned above, we are impressed by Dropbox’s ability to eke out solid top-line growth amid a tough macroenvironment where many customers and businesses are rethinking their technology spending. Dropbox’s average revenue per user, or ARPU, for the fourth quarter decreased year over year to $134.52 from $134.78 with unfavorable foreign exchange movements driving the decline. Dropbox’s Teams plan, designed for business users, continued to see strong adoption with roughly 35% of Dropbox’s paying users using the Teams plan. With Teams users using Dropbox’s collaboration tools along with its storage capabilities, we see them as stickier than individuals using Dropbox purely for content storage.

On the profitability front, Dropbox reported a 20-basis-point adjusted operating margin expansion to 29.9% from 29.7% a year ago. As Dropbox operates in an area of technology that we see as unlikely to grow rapidly, we concur with management’s focus on cash flow generation and profitability.