Here's Why Dropbox (DBX) is a Strong Growth Stock

Dropbox DBX reported third-quarter 2024 non-GAAP earnings of 60 cents per share, which beat the Zacks Consensus Estimate by 15.38% and increased 7.1% year over year.

DBX’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters, the earnings surprise being 13.65%, on average.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

Revenues of $638.8 million inched up 0.9% year over year and beat the consensus mark by 0.29%. Total annual recurring revenues came in at $2.579 billion, up 2.1% year over year.

Dropbox, Inc. Price, Consensus and EPS Surprise

Dropbox, Inc. price-consensus-eps-surprise-chart | Dropbox, Inc. Quote

What Can You Expect from DBX Shares Post Q3 Results?

Dropbox shares were slightly down following the third-quarter 2024 results. Year to date, DBX shares have declined 5.4%, underperforming the Zacks Computer & Technology sector’s return of 28.4%.

It has also underperformed the Zacks Internet Services industry and peers, including Alphabet GOOGL. While Alphabet returned 29.6%, the industry appreciated 24.3% over the same timeframe.

DBX offered positive guidance for 2024, expecting both gross and operating margins to rise on a narrower revenue base. It is suffering from stiff competition in the File Sync and Share (FSS) business amid a challenging macroeconomic environment.

The launch of the AI-powered universal search product, Dropbox Dash, for business users in October is a noteworthy development. This is expected to boost clientele.

DBX’s Paid User Base Rises in Q3

Dropbox exited the third quarter of 2024 with 18.24 million paying users, marking sequential growth of nearly 19,000. The average revenue per paying user was $139.05 compared with $138.71 in the year-ago quarter.

DBX is a leader in the content sharing and collaboration applications category that is currently worth $12 billion, per IDC estimates. DBX currently supports more than 700 million registered users through its FSS plans and has better market share than Apple AAPL and Box BOX.

Per IDC’s May 2024 report, Dropbox enjoys a market share of 20.9%, followed by Alphabet’s Google with a 16.4% share, and Box’s 8.8%, while Apple has an 8.6% market share. Microsoft, with a 29.4% market share, was placed at #1 by IDC.

DBX’s Margins Expand in Q3

In the third quarter, Dropbox reported a non-GAAP gross margin of 84%, expanding 140 basis points (bps) year over year.

In the reported quarter, research and development expenses were $155.4 million, up 1.8% year over year. Sales & marketing expenses increased 3.7% year over year to $101 million. General & administrative expenses rose 7.3% year over year to $48.8 million.

Dropbox reported a non-GAAP operating margin of 36.2%, up 30 bps year over year.

Balance Sheet & Cash Flow

As of Sept. 30, 2024, Dropbox had cash, cash equivalents and short-term investments of $890.8 million compared with $1.06 billion as of June 30, 2024. Available liquidity was $1.36 billion as of Sept. 30.

In the third quarter, the company reported a free cash flow of $270.1 million compared with $224.7 million reported in the previous quarter.

In second-quarter 2024, more than 11 million shares were repurchased, totaling $260 million. As of the end of the second quarter, approximately $868 million remained under the current repurchase authorization.

Dropbox Raises 2024 Margin Guidance

For the third quarter of 2024, Dropbox expects revenues between $635 million and $638 million. The company expects a forex tailwind of less than $0.5 million.

Non-GAAP operating margin is expected to be around 32%.

For 2024, it expects revenues between $2.542 billion and $2.545 billion (compared with previous guidance of $2.540-$2.550 billion). At constant currency, revenues are expected between $2.538 billion and $2.541 billion (compared with previous guidance of $2.537-$2.547 billion).

The company expects gross margin to be 84% (up from the previous guidance range of 83-83.5%) for the full year. Non-GAAP operating margin is expected to be roughly 36% (up from the previous guidance range of 33.5-34%).

Dropbox expects free cash flow between $860 million and $875 million (down from previous guidance between $910 million and $950 million).

Zacks Rank

Currently, Dropbox carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Dropbox (DBX) came out with quarterly earnings of $0.60 per share, beating the Zacks Consensus Estimate of $0.52 per share. This compares to earnings of $0.56 per share a year ago. These figures are adjusted for non-recurring items.

This quarterly report represents an earnings surprise of 15.38%. A quarter ago, it was expected that this online file-sharing company would post earnings of $0.52 per share when it actually produced earnings of $0.60, delivering a surprise of 15.38%.

Over the last four quarters, the company has surpassed consensus EPS estimates four times.

Dropbox, which belongs to the Zacks Internet - Services industry, posted revenues of $638.8 million for the quarter ended September 2024, surpassing the Zacks Consensus Estimate by 0.29%. This compares to year-ago revenues of $633 million. The company has topped consensus revenue estimates four times over the last four quarters.

The sustainability of the stock's immediate price movement based on the recently-released numbers and future earnings expectations will mostly depend on management's commentary on the earnings call.

Dropbox shares have lost about 5.4% since the beginning of the year versus the S&P 500's gain of 24.3%.

What's Next for Dropbox?

While Dropbox has underperformed the market so far this year, the question that comes to investors' minds is: what's next for the stock?

There are no easy answers to this key question, but one reliable measure that can help investors address this is the company's earnings outlook. Not only does this include current consensus earnings expectations for the coming quarter(s), but also how these expectations have changed lately.

Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. Investors can track such revisions by themselves or rely on a tried-and-tested rating tool like the Zacks Rank, which has an impressive track record of harnessing the power of earnings estimate revisions.

Ahead of this earnings release, the estimate revisions trend for Dropbox: mixed. While the magnitude and direction of estimate revisions could change following the company's just-released earnings report, the current status translates into a Zacks Rank #3 (Hold) for the stock. So, the shares are expected to perform in line with the market in the near future. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

It will be interesting to see how estimates for the coming quarters and current fiscal year change in the days ahead. The current consensus EPS estimate is $0.51 on $642.11 million in revenues for the coming quarter and $2.22 on $2.54 billion in revenues for the current fiscal year.

Investors should be mindful of the fact that the outlook for the industry can have a material impact on the performance of the stock as well. In terms of the Zacks Industry Rank, Internet - Services is currently in the top 26% of the 250 plus Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

One other stock from the same industry, Zscaler (ZS), is yet to report results for the quarter ended October 2024.

This cloud-based information security provider is expected to post quarterly earnings of $0.63 per share in its upcoming report, which represents a year-over-year change of -6%. The consensus EPS estimate for the quarter has remained unchanged over the last 30 days.

Zscaler's revenues are expected to be $605.68 million, up 21.9% from the year-ago quarter.

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