Of the 12 analysts tracking Dropbox (DBX), seven have recommended “buys,” four have recommended “holds,” and one has recommended a “sell” on the stock. Analysts have a 12-month average target price of $32.27 on the stock, which indicates a potential upside of 31.1% from its current price.
Is Dropbox stock undervalued?
Dropbox is trading at a forward PE multiple of 42.6x. This multiple seems expensive considering the company’s earnings growth rate going forward. Dropbox’s earnings are expected to expand just 4.9% in 2019. Its earnings growth could increase to 34.9% in 2020, and its EPS are expected to rise 15.1% in the next five years.
Dropbox will have to grow its earnings at a far higher pace to keep investors interested.
Competition with tech giants
While Dropbox has been able to grow its revenue at a robust pace, it competes with tech giants such as Microsoft (MSFT), Amazon (AMZN), and Google (GOOGL). These companies can afford to burn cash to lower their subscription plan fees and expand their user bases.
One of the major challenges affecting Dropbox’s revenue growth is its uninspiring conversion of paid users. The company’s total number of paid users accounts for just 3% of its total user base. Though Dropbox’s paying user base increased 15.4% to 12.7 million in the fourth quarter of 2018, higher growth may have better driven investors’ interest.
Dropbox continues to add capabilities to expand its user base.