Dropbox (DBX)

Cloud storage company Dropbox (NASDAQ:DBX) announced better-than-expected revenue in Q4 CY2025, but sales fell by 1.1% year on year to $636.2 million. Its non-GAAP profit of $0.68 per share was 1.6% above analysts’ consensus estimates.

Company Overview

Originally named after the founders' tendency to "drop" files into a shared folder, Dropbox (NASDAQ:DBX) provides a content collaboration platform that helps individuals and teams store, organize, share, and work on files from anywhere.

The catch phrase "digital transformation" originally referred to the digitization of documents within enterprises. The growth of digital documents has spurred an explosion of collaboration within and between businesses, which in turn is driving the demand for e-signature and content management platforms.

Dropbox competes with major tech companies in the cloud storage market, including Microsoft OneDrive, Google Drive, Apple iCloud, and Amazon Drive. In the content collaboration space, it faces competition from Microsoft SharePoint, Google Workspace, and Atlassian products. For enterprise deployments, Box (NYSE:BOX) is a direct competitor, while DocuSign (NASDAQ:DOCU) and Adobe (NASDAQ:ADBE) compete with Dropbox's e-signature offerings.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Dropbox’s sales grew at a weak 5.7% compounded annual growth rate over the last five years. This fell short of our benchmark for the software sector and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within software, a half-decade historical view may miss recent innovations or disruptive industry trends. Dropbox’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

This quarter, Dropbox’s revenue fell by 1.1% year on year to $636.2 million but beat Wall Street’s estimates by 1.1%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. This projection doesn't excite us and indicates its products and services will face some demand challenges.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Dropbox’s ARR came in at $2.53 billion in Q4, and it averaged 1.2% year-on-year declines over the last four quarters. This performance mirrored its total sales, showing the company lost long-term deals and renewals. It also suggests there may be increasing competition or market saturation.

Dropbox reported 18.08 million customers at the end of the quarter, a sequential increase of 10,000. That’s a little better than last quarter and quite a bit above the typical growth we’ve seen over the previous year. However, the increase in customers wasn’t backed by an equivalent increase in annualized recurring revenue (ARR), suggesting that Dropbox is disproportionately winning smaller customers.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

It’s relatively expensive for Dropbox to acquire new customers as its CAC payback period checked in at 137.5 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

For software companies like Dropbox, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Dropbox’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 80.2% gross margin over the last year. Said differently, roughly $80.15 was left to spend on selling, marketing, and R&D for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Dropbox has seen gross margins decline by 0.8 percentage points over the last 2 year, which is poor compared to software peers.

Dropbox produced a 79.2% gross profit margin in Q4 , marking a 2.4 percentage point decrease from 81.6% in the same quarter last year. Dropbox’s full-year margin has also been trending down over the past 12 months, decreasing by 2.5 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Dropbox has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 27.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Dropbox’s operating margin rose by 8.3 percentage points over the last two years, as its sales growth gave it operating leverage.

This quarter, Dropbox generated an operating margin profit margin of 25.5%, up 11.8 percentage points year on year. The increase was solid, and because its revenue and gross margin actually decreased, we can assume it was more efficient because it trimmed its operating expenses like marketing, R&D, and administrative overhead.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Dropbox has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 36.9% over the last year.

Dropbox’s free cash flow clocked in at $224.9 million in Q4, equivalent to a 35.4% margin. This result was good as its margin was 2.6 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts’ consensus estimates show they’re expecting Dropbox’s free cash flow margin of 36.9% for the last 12 months to remain the same.

We were impressed by Dropbox’s strong growth in customers this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. However, ARR was just in line and billings saw a 1% year-on-year decline, a poor omen for future revenue. Overall, this print was mixed. Guidance will be given on the earnings call, and that could move the stock further. So far, investors were likely hoping for more, and shares traded down 1.8% to $24.43 immediately after reporting.

Updated: February 19, 2026 at 9:31 PM EST

Before investing in or passing on Dropbox, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Dropbox doesn’t pass our quality test. For starters, its revenue growth was weak over the last five years, and analysts expect its demand to deteriorate over the next 12 months. While its bountiful generation of free cash flow empowers it to invest in growth initiatives, the downside is its ARR has disappointed and shows the company is having difficulty retaining customers and their spending. On top of that, its expanding operating margin shows it took many unnecessary costs out of the business.

Dropbox’s price-to-sales ratio based on the next 12 months is 2.5x. This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $28.33 on the company (compared to the current share price of $24.15).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.