One of the surprise comeback stories of 2021 was Drop box (NASDAQ: DBX). The shares of the file storage and collaboration platform have grown by around 40% year-to-date, while the S&P 500 the index returned 16%.

Even with fierce competition from giants like Microsoft and Alphabet, Dropbox has grown steadily over the past few years, has made smart acquisitions, and uses an aggressive ROI strategy. But with stocks outperforming the market so far in 2021 after a few years of disappointing returns, is it time to sell your Dropbox stocks and lock in those gains?

Finances keep improving

In its most recent quarter ending in March, Dropbox increased its annual recurring revenue (ARR) to $ 2.1 billion, up 13% year-over-year. It’s not crazy growth compared to other software stocks, but unlike many of its peers, Dropbox is actually profitable. In the first quarter, net income increased 21% to $ 47.6 million, while free cash flow reached $ 108.8 million, more than four times higher than in the same period of the previous year.

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As it slowly grows its paying users, Dropbox is seeing strong operating leverage, which should allow it to steadily increase its profit and cash margins over time. In the first quarter earnings call, management raised its free cash flow forecast for the full year to $ 670 million to $ 690 million. Dropbox’s goal is to reach $ 1 billion in annual free cash flow by 2024. The increase in its guidance for 2021 shows that the company is on track to meet that number and is likely to be. one of the main reasons the stock is soaring this year.

Acquisition strategy

Part of the reason Dropbox has maintained solid growth is due to the two targeted acquisitions it made to improve its platform. In 2019, it acquired the digital signature company Hellosign, which offers a product similar to Docusign. According to management, Hellosign signature requests increased by more than 70% from 2019 to 2020. Dropbox does not disclose the revenue generated by Hellosign, but this strong growth in usage shows how to integrate the product into Dropbox and sell it from crossover with Dropbox subscriptions. can help improve Hellosign’s business.

More recently, Dropbox acquired DocSend, another document-based subscription product that allows users to gain real-time control and insight after sending documents to third parties. It’s popular with investment funds, marketers, and investor relations teams, and it should help Dropbox improve its value proposition for paid subscribers if the product is paired with traditional Dropbox subscriptions.

Valuation is progressively increasing

With stock up 40%, but its overall financials not rising as quickly, Dropbox’s valuation soared in the first half of 2021. Its market cap is now $ 12 billion, which gives it a price tag of term relative to Free Cash Flow (P / FCF) of 18 if it can reach the midpoint of its forecast for the year 2021. This is not too expensive, but given the modest growth rate of the year. business, that doesn’t sound like a good deal either.

To help restore shareholder value, Dropbox implements an aggressive share buyback program (this can also help alleviate valuation issues). This winter, it authorized $ 1 billion in share buybacks on top of its old $ 600 million program, which will help the company reduce its number of shares (a good thing for existing shareholders).

In the first quarter, Dropbox repurchased $ 432 million worth of shares, reducing its number of shares to 401 million from 413 million a year ago. The company is funding some of those buybacks with its own profits, but part of it comes from the $ 1.4 billion of convertible debt it raised this winter. These bonds, which mature in 2026 and 2028, can be converted into Dropbox shares by bondholders if the Dropbox share price exceeds a certain level, negating some of the benefits of recent buybacks. If Dropbox continues to increase its free cash flow, shareholders shouldn’t be worried about that.

So is it time to sell?

Even though the stock is so high this year, now is not the time to sell Dropbox stock. The valuation is still reasonable, and if Dropbox can continue to increase its free cash flow while simultaneously repurchasing stocks, its valuation should remain reasonable even if stocks continue to rise. In fact, if you don’t own shares of Dropbox, now might be the time to buy a stake in that company, especially if you’re put off by the sky-high valuations of other software and tech stocks. .

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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