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Fastly vs. Dropbox: Which Cloud Stock is a Better Buy Choice?

·7 min read

With rapid global digitalization and deployment of 5G, the demand for cloud platforms is expected to continue climbing. So, the industry tailwinds should help Dropbox (DBX) and Fastly (FSLY) benefit this year. But let’s find out which of these software stocks is a better buy now.

Dropbox, Inc. (DBX) in San Francisco, and Fastly, Inc. (FSLY), which is also headquartered in San Francisco, are two popular companies in the cloud-computing space. DBX provides online file storage and sharing services. It operates its Dropbox platform, which offers a range of collaboration, editing, document management, and synchronization tools for individuals and business teams worldwide. FSLY operates an Infrastructure-as-a-Service edge cloud platform, which offers cloud computing, image optimization, security, edge computer technology, streaming solutions, and real-time content delivery network (CDN) services.

Since the beginning of the pandemic, the cloud-computing market has been witnessing huge demand from small- to large-sized businesses and enterprises that are seeking to make their operations efficient. The continuation of remote working due to the resurgence of COVID-19 cases should drive the demand for efficient and secure cloud platforms even more amid increasing cybersecurity threats. The global cloud computing market is projected to grow at a 17.9% CAGR to $791.48 billion by 2028. So, both DBX and FSLY should benefit from the growing demand for their solutions this year and beyond.

But while FSLY’s shares lost 21.6% over the past month, DBX gained 4.1%. And in terms of the past year’s performance, DBX is a clear winner with 68.6% gains versus FSLY’s negative returns. But, which of these stocks is a better pick now? Let’s find out.

Click here to check out our Cloud Computing Industry Report for 2021

Latest Movements

On March 22, 2021, DBX acquired DocSend, a secure document sharing and analytics company. The increased demand for efficient digital tools in hybrid working models that help people organize their content and seamlessly collaborate with each other should enable DBX, HelloSign, and DocSend to generate solid returns in the coming months from the offering of secure, self-serve products to their customers.

On July 27, 2021, FSLY announced the beta availability of the Signal Sciences agent on its Fastly edge cloud platform. With this integration, customers will be able to leverage the powerful Signal technology to write and push out rules in real-time to track suspicious requests and block attacks sooner, amid the rise of DDoS and web application attacks. This represents a critical milestone toward FSLY’s goal of empowering developers to protect apps and APIs in every environment.

Recent Financial Results

DBX’s revenue for its fiscal second quarter, ended June 30, 2021, increased 13.5% year-over-year to $530.60 million. The company’s non-GAAP gross profit has been reported at $431.10 million, representing a 16.4% year-over-year improvement. DBX’s non-GAAP income from operations came in at $169.40 million, up 76.1% from the prior-year period. While its non-GAAP net income increased 72.2% year-over-year to $160.50 million, its non-GAAP EPS increased 81.8% to $0.40. The company had $885.30 million in cash and cash equivalents as of June 30, 2021.

For its fiscal second quarter ended June 30, 2021, FSLY’s non-GAAP revenue increased 13.9% year-over-year to $85.03 million. The company’s non-GAAP gross profit came in at $49.01 million, up 6.4% from the prior-year period. Its non-GAAP operating loss has been reported $17.56 million for the quarter, compared to $1.84 million in operating income in the year-ago period. FSLY’s non-GAAP net loss came in at $17.39 million, compared to $1.82 million in income in the prior-year period. And its non-GAAP loss per share has been reported at $0.15, compared to $0.02 in EPS in the year-ago period. As of June 30, 2021, the company had $687.99 million in cash and cash equivalents.

Past and Expected Financial Performance

DBX’s revenue has increased 13.2% over the past year. Analysts expect DBX’s revenue to increase 11.7% year-over-year in the current quarter (ending September 30, 2021), 11.8% in the current year, and 9.4% next year. Its EPS is expected to grow 36.3% in the current quarter, 55.9% in the current year, and 7.8% next year. The stock’s EPS is expected to grow at a 16.8% rate per annum over the next five years.

In comparison, FSLY’s revenue grew 31.2% over the past year. Analysts expect FSLY’s revenue to increase 18.6% year-over-year in the current quarter (ending September 30, 2021), 18.7% in the current year, and 20% next year. Its EPS is expected to decline 365.1% in the current quarter, 238.3% in the current year, and increase 22.9% next year. However, analysts expect the stock’s EPS to grow at a 30% rate per annum over the next five years.

Profitability

DBX’s trailing-12-month revenue is 6.3 times FSLY’s. DBX is also more profitable, with an 18.6% EBITDA margin versus FSLY’s negative value.

Also, DBX’s 4.7% and 6.7% respective ROA and ROTC values compare favorably with FSLY’s negative values.

Valuation

In terms of non-GAAP forward P/E, DBX is currently trading at 22.23x, compared to FSLY’s negative 70.57x. And in terms of forward EV/Sales, FSLY’s 14.01x is 132.3% higher than DBX’s 6.03x.

POWR Ratings

While FSLY has an overall F grade, which translates to Strong Sell in our proprietary POWR Ratings system, DBX has an overall B grade, equating to Buy. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

In terms of Quality, DBX has been graded an A, which is consistent with its higher-than-industry profitability ratios. DBX’s 11.2% trailing-12-month EBIT margin is 30.1% higher than the 8.6% industry average. In comparison, FSLY’s D grade for Quality is in sync with its negative EBIT margin.

DBX has a C grade for Value, which is consistent with its slightly higher-than-industry valuation ratios. DBX’s 16.99x forward EV/EBITDA is 3.5% higher than the 16.41x industry average. However, FSLY’s D grade for Value reflects its overvaluation. The company has a 14.01x forward EV/Sales, which is 255.6% higher than the 3.94x industry average.

Of the 154 stocks in the Software - Application industry, FSLY is ranked #153. On the other hand, DBX is ranked #3 of 73 stocks in the Technology - Services industry.

Beyond what we’ve stated above, our POWR Ratings system has also rated both DBX and FSLY for Sentiment, Growth, Stability, and Momentum. Get all FSLY ratings here. Also, click here to see the additional POWR Ratings for DBX.

Click here to check out our Software Industry Report for 2021

The Winner

The heightened demand for cloud platforms from enterprises for better collaboration with their remote workforce and safe storage of documents should benefit DBX and FSLY. However, its relatively lower valuation and higher profitability we think make DBX a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology - Services industry, and here for those in the Software - Application industry.

Click here to check out our Cloud Computing Industry Report for 2021

DBX shares were trading at $31.29 per share on Monday morning, down $0.84 (-2.61%). Year-to-date, DBX has gained 41.01%, versus a 19.31% rise in the benchmark S&P 500 index during the same period.


About the Author: Sweta Vijayan


Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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