Over the last six months, Dropbox’s shares have sunk to $27.31, producing a disappointing 8.6% loss - a stark contrast to the S&P 500’s 10.8% gain. This may have investors wondering how to approach the situation.

Is now the time to buy Dropbox, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Dropbox Will Underperform?

Even with the cheaper entry price, we're swiping left on Dropbox for now. Here are three reasons you should be careful with DBX and a stock we'd rather own.

1. Billings Hit a Plateau

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Over the last year, Dropbox failed to grow its billings, which came in at $646.7 million in the latest quarter. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation.

2. Projected Revenue Growth Shows Limited Upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Dropbox’s revenue to stall, close to its 5.1% annualized growth for the past five years. This projection doesn't excite us and implies its newer products and services will not catalyze better top-line performance yet.

3. Operating Margin Rising, Profits Up

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Analyzing the trend in its profitability, Dropbox’s operating margin rose by 6.1 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 26.8%.

Final Judgment

We cheer for all companies solving complex business issues, but in the case of Dropbox, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 2.6× forward price-to-sales (or $27.31 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. Let us point you toward an all-weather company that owns household favorite Taco Bell.

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