Introduction

For starters, this will be a smaller position in my portfolio. I do not think this company is the next Apple or Amazon. But, I think putting some capital into this company is attractive at these prices. I would love some constructive criticism here on what I may or may not be missing. I could make this post 5x longer going over the details of the business, but this is already long enough.

What are some risks I may have missed?

What are some attractive traits I am not noticing?

Should a SAAS business with the given qualities of Dropbox trade at a ~9 P/FCF?

Should I make this a large/small position?

Why I Bought

I recently started a position in Dropbox (DBX) as I believe it has a compelling opportunity for ample returns over the next few years. The business qualities are what I would consider to be “ok” but not extraordinary by any means.

The pros are that it's a Subscription based business with reasonably low churn. Top-Line & Bottom-Line growth has been Consistent since IPO. Shares Outstanding have been decreasing for the last few years. Additionally, they have been expanding their product lines to try and increase their moat.

The cons are, the business has a smaller TAM than most tech giants. The moat/stickiness of the product is not very strong. I also think their pricing power is rather low.

The one incredibly attractive part of this story is the valuation. They have grown revenue and profits on a consistent basis for years. They are still projecting around 5%-10% top & bottom line growth this year.

The company consistently trades at a perpetually low valuation due to the threat of big tech “Always around the corner.” While it is possible for their products to be replaced, Dropbox has continually carved out a segmented market of its own. The stock is still below its IPO price of almost 5 years ago despite consistent growth.

The company projects a midpoint of $840M for 2023. If the company is currently trading at a 7.55B valuation, then that means their current 2023 P/FCF is at ~8.99.

Lastly, the company is currently buying back around ~7.5% of the company's market cap annually. This could go as high as +10% of the stock stays in the low 20s.

While the company does not have the most superior metrics in the world, at what point does the cheap become TOO cheap. I can't resist buying a SAAS company at a ~8.99 P/FCF. What are your thoughts? Thanks.