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Investing, Stocks  | July 14, 2020

Work from home stocks are on fire right now. But one work from home name which has been left behind in this broad rally is secure storage provider Dropbox (NASDAQ:DBX), with Dropbox stock up just 25% year-to-date.

That’s better than wider markets, but compare it to 50%+ gains for the likes of Atlassian (NASDAQ:TEAM) and Slack (NYSE:WORK), 100%+ gains for Twilio (NASDAQ:TWLO) and DocuSign (NASDAQ:DOCU) and the 300%+ gain in Zoom (NASDAQ:ZM) stock.

Clearly, Dropbox stock has been the laggard. But this lag makes DBX stock the best work from home stock to buy today.

Dropbox’s Lag isn’t Rational

Dropbox stock has lagged other work from home stocks because investors are broadly concerned that the company’s core secure storage solution isn’t as mission-critical to remote work environments as the solutions offered by other companies, such as video teleconferencing software or enterprise communications platforms.

That’s true. Companies don’t need Dropbox to survive in a work from home world the same way they need a communication platform such as Slack or Microsoft (NASDAQ:MSFT) Teams. Ubiquity will never be the thing for Dropbox.

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, especially in a world where employees are working remotely.

As such, while Dropbox won’t see a Zoom-like or DocuSign-like demand surge amid the Covid-19 pandemic, it will see a sizable increase in demand.

And this demand surge won’t fade over time. For many — like those employed at Square (NYSE:SQ), Twitter (NYSE:TWTR), Shopify (NYSE:SHOP) and Facebook (NASDAQ:FB) — work from home is a permanent lifestyle change. Many employees won’t ever go back to the office.

If they don’t, demand for Dropbox’s remote-work-focused secure storage and workflow management solutions will remain persistently robust.

To that end, the significant lag in Dropbox stock in 2020 doesn’t make much sense.

Should Dropbox stock be up 300% like Zoom stock? No. Of course not.

But should it be up more than 25% when all of its peers are up 50% or more? Absolutely.

Dropbox Stock is Attractively Undervalued

Relative to its work from home peers, Dropbox stock is very attractively valued.

DBX stock trades at 30-times forward earnings. WORK stock trades at nearly 30-times forward sales. Yes, you read that right. DBX stock’s forward earnings multiple essentially matches WORK stock’s forward sales multiple.

Meanwhile, TEAM stock trades at 140-times forward earnings. ZM stock trades at 210-times forward earnings. DOCU stock trades at 450-times forward earnings.

In a sea of richly valued work from home stocks, DBX stock stands out at as the one attractively valued name in the group.

The numbers suggest 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

Given that shares have lagged peers year-to-date and that the valuation is significantly discounted, Dropbox stock is the best work from home stock to buy today.

I fully expect DBX stock to rally more than 50% from here over the next 6 to 12 months.

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