Box: Stay On The Sidelines This Year

Jul. 24, 2019 12:53 PM ETBox, Inc. (BOX)7 Comments


  • Box is a leader in the highly competitive cloud content management market segment.
  • Revenue growth has been in decline for several years, and with lower guidance this year, the stock price has taken a hit.
  • The company fails on the Rule of 40, gross profit margin is falling, and SG&A expense is too high.
  • For these reasons, I have assigned a neutral rating for this company.

Box, Inc. (NYSE:BOX) is a leader in the highly competitive cloud content management market with a platform that allows secure access, storage, and sharing of content on the cloud. BOX has more than 95,000 paying organizations, and the application is offered in 24 languages.

Box platform

(Source: Box)

While Box grew revenues by 19% in the last year, there are several negative factors, including a low score for the Rule of 40, declining gross profit margin and high SG&A expense relative to sales. The declining profit margin is likely a result of increasing competition plus longer and more expensive sales cycles. I don't see the situation improving this year. For these reasons, I assign Box a neutral rating.

Box has had a rough 2019 so far. The last two quarterly reports in March and June were not received well by shareholders, with the stock price dropping 18% and 8%, respectively, amidst lowered guidance. The company hired new sales staff in 2018 with plans to hire more this year and has recently hired a new Chief Revenues Officer (CRO). Box is also introducing new functionality to the platform in an attempt to increase retention rate and cross-selling.

While the above are positive factors for the company, I don't expect to see any real results from these initiatives this year. And, given the competitiveness in cloud content management, I think it is prudent to see how the new products perform before considering an investment in Box.

Company Fundamentals

When it comes to software companies, I don't rely on traditional value factors; instead, I focus on other measures, such as the "Rule of 40" and relative valuation. Relative valuation is a concept that I recently developed that compares forward sales multiple versus estimated sales growth.

Relative Stock Valuation

It seems logical to me that high-growth

This article was written by

Steve Auger profile picture
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I have been trading stocks, commodities, and options for more than 25 years. I have honed my skills in quantitative analysis and various stock investment tools for 15 years at Portfolio123 and offer services as a consultant in stock portfolios. I also own the financial data service Equity Analytx which provides aggregated fundamentals for a wide range of industries.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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