Dropbox’s Unusually Active Call Is a Screaming Buy Before Today’s Q1 2024 Results

Tal Education Group (TAL)had the highest Vol/OI ratio for call options in Wednesday's trading with a volume of 11,699, 115.83x its open interest. There were 549 call options with a Vol/OI ratio of 1.25 or greater, which is the cutoff for unusual options activity. 

In the 25th spot was Dropbox’s (DBX)Jan. 17/2025 $32 call, which had a volume of 9,755, 17.27x its open interest. As a result of the call’s volume, Dropbox’s total options volume yesterday was 24,800, about 7x its 30-day average. The last time it had that much volume was Feb. 16 (38,281), when it traded down 23% on weak revenue guidance in 2024. 

Although its share price has drifted slightly lower in the past three months, the call is a screaming buy, with Q1 2024 results out after today’s close. Here’s why.

It’s Dirt Cheap

As I write this, the markets have just opened for trading. The Jan. 17/2025 $32 call has not shown any activity. It closed yesterday’s trading with a $0.50 ask price and a share price of $23.32. 

Based on these numbers, the down payment is 1.6%, and the option expires in 254 days, leaving you plenty of time to get back into the $30s. Further, with a 0.16231 delta, its shares only have to rise by $3.08 (13.2%) within the next nine months for you to double your money by selling the option before expiry. 

So, from my perspective, the $50 entry fee is dirt cheap, providing buyers with minimal risk and unlimited upside potential. 

As trading progresses, I’ll discuss how things look with new volume. 

In the meantime, not only is the call dirt cheap, but so too is the share price. 

In its February Q4 2023 conference call, CFO Tim Regan discussed its guidance for 2024. As I said in the intro, its shares crashed after it said that it would generate revenues this year of $2.54 billion at the midpoint, $30 million shy of the analyst estimate. 

Frankly, I often wonder why markets react so poorly to a miss of 1.2% on what is only an estimate. It seems pretty arbitrary, but that’s the beauty of investing. It’s not always rational. 

As for free cash flow, Regan projected $930 million in free cash flow in 2024 at the midpoint of its guidance, a 36.6% margin, which is not too shabby. 

Based on an enterprise value of $8.57 billion, Dropbox has a free cash flow yield of 10.9%. I consider anything over 8% to be in value territory.

Of course, today’s results could change all this, but generally speaking, Dropbox’s valuation metrics are cheaper than they’ve been over the past five years. 

Growth Is a Problem

There is no question that the company's growth is not what most investors look for in a tech stock. For example, it lost 50,000 paying users sequentially in Q4 2023, finishing the year with  18.12 million. On a positive note, it ended 2024 with 420,000 additional paying users, 2.4% higher than in 2023. 

So, it’s not as if it’s not growing; it just may not be at the rate investors would like it to be.

Further, the top-line revenue grew 9.3% (excluding currency) in 2024, to $2.50 billion, with non-GAAP EPS of $1.98, 25.3% higher than a year ago. That’s hardly mailing it in. 

For Q1 2024, it expects revenue of $628.5 million at the midpoint of its guidance, 2.8% higher than $611.1 million in Q1 2023. In terms of its non-GAAP operating profit, it expects to generate a first-quarter operating margin of around 33%, which translates to $207.41 million in non-GAAP operating profits, 18.6% higher than $174.83 million in Q1 2023. 

Dropbox may fall short on revenues, non-GAAP operating profits, and paying users when it announces this afternoon. However, it may exceed its own and the analysts' expectations. 

If you’re a value investor, I  don’t see how you can’t be at least mildly interested in the risk/reward proposition. 

With $1.36 billion in cash and short-term investments on the balance sheet as of Dec. 31 and net debt of just $675 million, it isn’t going out of business anytime soon.

The Bottom Line on Dropbox

Dropbox isn’t Nvidia (NVDA). However, it’s not a crappy meme stock, either. It’s got a legitimate business with a steady-as-she-goes strategy for converting its 700 million-plus non-paying users into more paying users while generating more per paying users.

In 2023, it launched Dropbox Dash, which utilizes AI and machine learning to help users find things. 

“With more of our work spread across hundreds of tabs in a browser, knowledge workers are spending far too much time, just finding what they need to do their work, particularly in this new world of distributed work,” CEO and co-founder Drew Houston stated in its Q4 2023 conference call. 

“Dash connects all of your apps, tools, and content in a single search bar, so it's easy to find everything you need in one place, regardless of where it lives. And because Dash is powered by machine-learning, it learns about you and your priorities, the more you use it.”

It hasn’t forgotten about AI. 

Circling back to the Jan. 17/2025 $32 call, it’s already got a volume of 2,132, with an ask price of $0.45, so it’s even cheaper. 

It’s a screaming buy.