The drop in Dropbox stock could be worth the risk

When does a falling knife become too tempting not to try to catch? With the broader stock market rising to all-time highs on the back of risk sentiment that continues to strengthen, there are only a handful of stocks out there that are falling right now.

One of these titles is Dropbox, Inc. NASDAQ:DBX, whose shares were trading at multi-year highs just two weeks ago but have since fallen about 30%. It will be a bitter pill to swallow for Dropbox investors, who will be forgiven for wondering why their shares, among the hundreds of tech companies out there, are bucking the broader trend.

Slowing of growth

Everything started going wrong for the cloud storage giant around Valentine’s Day when they released their fourth quarter earnings. Demonstrating how fickle investors can be, the stock sank even as Dropbox delivered a solid beat against expectations in both top-line revenue and trailing profits.

Additional positives from the report include the company’s expansion into artificial intelligence (AI) opportunities and solid increases in average revenue per paying user year over year. Operating margins have also improved significantly, but slowing growth, especially with Dropbox revenue, appears to outweigh all these bullish signs. For the fourth consecutive quarter, Dropbox’s ARR fell in a pattern that would give even the most optimistic investor cause for concern.

Dropbox shares plummeted at the opening and haven’t taken a breather since. Yesterday’s 2.5% drop brought the stock back to 2018 levels. On the same day, NVIDIA Corp NASDAQ:NVDA the profits sent the rest of the market soaring.

So what’s the angle here? Are we seeing a serious entry opportunity that will soon start to emerge once Dropbox’s fall has stabilized, or is this one of the few tech stocks that should be avoided? Before we dive deeper, it’s important to note that even though previous quarters have shown slowing revenue growth, Dropbox stock has had no trouble recovering over the past year. In fact, as of earlier this month, they had gained nearly 80% since March of last year, with much of those gains coming from last November.

However, it appears that last week’s report was the straw that broke the camel’s back for any remaining bulls who had been happy to ignore last year’s warning signs. In the two weeks following the report, analyst commentary was all in the negative. Bank of America and JPMorgan Chase are just two of the heavyweights that have lowered their ratings on Dropbox stock from Buy.

Take the knife

However, what’s interesting here is the speed of the stock’s current decline, both updated and lowered price targets by analyst teams above where Dropbox shares are trading today. Bank of America lowered its price target from $34 to $28, while JPMorgan Chase lowered it from $33 to $33.

With Dropbox stock set to go well above the $24 mark over the weekend, you can’t help but get the sense that there’s a serious entry opportunity opening up here. Taking into account the most optimistic of these price targets, we are looking at a targeted upside of at least 35%, a potential return that should tempt even the most cautious investor.

In support of the thesis of the entry opportunity there is the reading of the relative strength index (RSI) of the stock, which, at 19, indicates oversold conditions. Rarely does a stock maintain its downward pressure when the RSI is this extreme, and if Dropbox stock shows signs of stabilizing in Friday’s session, it would be a great value to move higher into next week.

The company will need to deliver a solid report next quarter that shows notable revenue growth to truly turn things around, but that doesn’t mean there isn’t an opportunity to capitalize on a potential overreaction in the meantime.

Before you consider Dropbox, you’ll want to hear it out.

MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Dropbox wasn’t on the list.

While Dropbox currently has a “Hold” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here