Alongside the rest of the technology sector, Dropbox (NASDAQ:DBX) fell off a cliff somewhat unexpectedly heading into the Labor Day Weekend, with shares shedding as much as 12% in a matter of two days. This sell-off in tech stocks — and specifically in DBX stock — is nothing more than a golden buying opportunity.
There’s nothing wrong with tech stocks besides the fact that they rallied too much. For months, these stocks could do no wrong. They kept pushing higher and higher and higher, to more and more extreme valuations. Eventually, gravity kicked in, and the result is a rapid sell-off in tech stocks to more reasonable valuation levels.
They’ll get to those more reasonable valuation levels. Soon. When they do, the sell-off will end, and the longer-term rally will resume, because the fundamentals underlying tech stocks remain as robust as ever.
That is, technology continues to disrupt every facet of our daily and professional lives, at an accelerated pace today because of Covid-19, and these companies’ influence, revenues and profits will only go way higher over the next 5 to 10 years.
So don’t run away from recent weakness in tech stocks. Embrace it.
Especially in DBX stock, because this stock is one of the few tech stocks that’s already in deeply undervalued territory and is ready to reverse course in a big way.
Here’s a deeper look.
Compelling Growth Potential for DBX Stock
Dropbox stock is supported by compelling long-term growth potential in the hybrid work environment of the future.
In a world where hybrid work is the norm — which, make no mistake, is the world we are heading into, because hybrid work maximizes employee output and reduces employer costs — cloud-hosted document storage platforms like the one Dropbox offers will become globally ubiquitous.
To be sure, Dropbox itself won’t ever reach enterprise ubiquity. There are ton of online storage platforms and services out there. Dropbox is just one of many.
But Dropbox’s cross-platform storage functionality — which allows users to securely store Office 365 spreadsheets next to Google Docs and Trello boards — is an immense value-add for enterprises with multiple digital workflow management tools. Plus, management continues to innovate and expand the functionality of its core cloud storage platform.
To that extent, Dropbox will forever remain one of the most important cloud storage companies out there, and demand for the company’s solutions will remain robust for the foreseeable future as companies across the globe pivot to a more permanent hybrid work environment.
Revenue growth trends will remain favorable. So will profit growth trends. And DBX stock will ultimately head higher long-term.
Enterprise Spending on the Mend
Dropbox is built on the back of enterprise spending, which — after falling off a cliff in early 2020 thanks to the Covid-19 pandemic — is now recovering at an impressive pace.
This recovery will persist for the foreseeable future.
That’s because Covid-19 hysteria continues to fade from the consumer landscape, so consumer behavior and spending are normalizing. The more those consumers spend, the more revenue companies will earn, and the more money those companies will have to spend on things like Dropbox.
A potential Covid-19 vaccine in late 2020 will only accelerate this behavior normalization, and therefore, only accelerate the recovery in consumer and enterprise spending.
As enterprise spending rebounds over the next few months, Dropbox demand and revenue trends will improve, and DBX stock will push higher.
Dropbox Stock Is Undervalued
In a sea of richly valued work from home stocks, DBX stock stands out at as the one attractively valued name in the group, with DBX trading at a huge discount to peers like DocuSign (NASDAQ:DOCU) and Zoom (NASDAQ:ZM).
The numbers suggest this discounted price is not fundamentally supported, and that a rally in Dropbox stock towards $30 is likely.
Assuming the company can continue to add around 300,000 to 400,000 new paying users every quarter, leverage its strong land-and-expand model to keep growing average revenue per user and improve profit margins with scale towards management’s long-term targets, then my modeling suggests that Dropbox is on its way towards netting $1.75 in earnings per share by 2025.
Based on a systems software sector-average 25-times forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for DBX stock of $30.
Bottom Line on DBX Stock
Dropbox stock is one of the best tech stocks to buy on the recent dip because the fundamentals are strong and the valuation is discounted.
This attractive combination implies healthy upside potential in DBX stock over the next few months.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.