Sizing Up The Opportunity in Dropbox (NASDAQ: DBX) After a 25% drop in shares over the past month, it's finally starting to look like the Dropbox (NASDAQ: DBX) bears are starting to get tired.

After a 25% drop in shares over the past month, it's finally starting to look like the Dropbox (NASDAQ: DBX) bears are starting to get tired. They've flatlined for the last fortnight and bounced off what's looking like a temporary low yesterday. That 3% jump could be the start of a rebound, with the stock's relative strength index (RSI) moving steadily higher out of the low 20s. Considering the cloud storage giant's earnings beat expectations last month, there's a lot to like about Dropbox down at these current levels.
That earnings report had revenue up 13% on the year, comfortably ahead of what analysts had been expecting, while their GAAP EPS print of $0.19 was about 11% higher than the consensus. In addition to these topline and bottom line beats, paying user numbers and the average revenue per paying user showed solid growth compared to the same time period last year.

Positive Sentiment

Investors would have been forgiven for thinking at the time that the report justified a strong bid to close out the year with a rally, rather than a fairly vicious selloff that's only just starting to lose steam. As CEO Drew Houston summed up at the time; "Q3 was another solid quarter with record free cash flow, strong revenue growth, and great progress against our strategic objectives as we focus on delivering more value to our customers and shareholders. We shipped several new product experiences to help our customers with today's challenges of distributed and remote work, and I'm confident in our future as we work toward our vision of building one organized place for content and all the workflows around it."

Despite all this positive momentum, however, shares fell solidly through November and are currently trading at 2018 levels, and well below where they IPO'd in the first half of that year. It seems that concerns about slowing growth rates spooked investors, but for those of us who believe in the long-term viability of cloud storage for the masses, it's hard to bet against Dropbox shares staying down here for long.

This is still a company that's generating strong free cash flows, with a management team that's shown themselves to be keen on innovation and market penetration. There have been several updates throughout 2021 of improvements to Dropbox's upload speeds, platform reliability, and ease of access. HelloSign was acquired in 2019 and has proved to be a massive compliment to Dropbox's enterprise user base, and the DocSend acquisition from the first quarter of this year should be no different. While even combined together they don't contribute a massive amount to the overall group revenue, they have an outsized effect on the offering's overall stickiness. Dropbox's most recent acquisition of Command E will drastically reduce search times and can be considered a long-term value add, but even with this news Dropbox shares have done nothing but fall since it was announced just before their November earnings.

Getting Involved

It's fair for investors to be wondering just what the company has to do to generate a bid in their shares. In addition to the aforementioned spending initiatives, the company has been actively trimming the fat and cutting costs where they can. As they move to a hybrid working model indefinitely, they expect to save upwards of $50 million in rent, which should flow through to improved margin prints in coming quarters.

Mayar Fund managing director Abdulaziz Alnaim recently disclosed that they've initiated a fresh position in Dropbox shares, calling the file storage company a "value proposition that is underestimated by the investment community." He believes the company is well-positioned to drive revenue growth by moving users from its free or low-cost products to higher-priced subscription services, and "that only a small proportion of those users currently pay for the service, though growing, gives the company a wonderful runway for growth in the years to come."

The recent drop in share price could end up being a rare golden buying opportunity for a Silicon Valley giant that is currently out of favor with Wall Street, but who has more than enough going for it to justify higher prices in the near and long term.