Dropbox Stock Gives Every Indication Of Being Fairly Valued
- By GF Value
The stock of Dropbox (NAS:DBX, 30-year Financials) gives every indication of being fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $24.86 per share and the market cap of $10 billion, Dropbox stock gives every indication of being fairly valued. GF Value for Dropbox is shown in the chart below.
Because Dropbox is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 17.9% over the past three years and is estimated to grow 11.62% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Dropbox has a cash-to-debt ratio of 1.00, which is worse than 68% of the companies in Software industry. The overall financial strength of Dropbox is 5 out of 10, which indicates that the financial strength of Dropbox is fair. This is the debt and cash of Dropbox over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Dropbox has been profitable 0 years over the past 10 years. During the past 12 months, the company had revenues of $1.9 billion and loss of $0.63 a share. Its operating margin of 6.33% in the middle range of the companies in Software industry. Overall, GuruFocus ranks Dropbox's profitability as poor. This is the revenue and net income of Dropbox over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Dropbox's 3-year average revenue growth rate is better than 78% of the companies in Software industry. Dropbox's 3-year average EBITDA growth rate is 57.6%, which ranks better than 91% of the companies in Software industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Dropbox's ROIC was 5.45, while its WACC came in at 6.29.
In short, the stock of Dropbox (NAS:DBX, 30-year Financials) appears to be fairly valued. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 91% of the companies in Software industry. To learn more about Dropbox stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
