Box: Accelerating Digital Transformation Improves Outlook
Summary
- Box has launched several features to enhance its content management platform to remain the leader in this space.
- The company has shown an uptick in non-GAAP operating margin this quarter.
- Box's stock price does not seem overvalued based on its historical multiples.
Box Inc (NYSE: NYSE:BOX) has surprised analysts by an 11% improvement in its non-GAAP operating margin this quarter. The company's future growth will be driven by its ability to continue its land-and-expand model while innovating against larger competitors. Potential investors would have to pay 4.16 price-to-sales, which does not appear unreasonable based on Box's historical trading multiples.
There is a faster shift towards digital-first workplace
With the shelter-in-place situation, many companies had to allow their companies to work from home and build the infrastructure to support it. With these infrastructure investments, it is unlikely that companies would simply switch back to the old way of working once the situation improves. This shift will continue to drive demand for remote work solutions and cloud platforms like Box. Box CEO Aaron Levie highlights this from his experience:
We are at the beginning of what will be one of the most transformative periods in business history. Over the past couple of months, I have been speaking with dozens of CIOs and CEOs of Fortune 500 companies and it's very clear that building toward a digital-first workplace will be a key pillar in a much broader new normal for how organizations operate going forward. The opportunities for flexible work, global and virtual teams and reimagined business processes have always been a key element in our vision.
(Source: Box Transcript)
Box is strengthening its platform with more features
Box has continued to expand its integrations with partners like Teams and Zoom, where usage has grown dramatically over the past few months. This would help the company compete against larger companies like Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) who have been increasing their presence in this space.
Box has also been launching multiple features such as automated malware detection and controls in Box Shield, Box for Slack integration and Box Connector for Okta Workflows. These improvements have helped Box increase its value proposition and retain its market leadership presence in cloud content management.
(Source: Investor Presentation)
Land-and-expand model has been working
Box is still in the early stages of capturing the full potential of use-cases within organizations. In most large organizations, Box has only penetrated roughly 10-20% of employees. As more companies go through an accelerated digital transformation, it is likely that Box will encounter more companies that will launch Box company-wide for all their employees. This increased conversions would then help to drive revenues at a faster pace:
In one case, we had a Fortune 500 company that was using Box in one subset of their organization and then they decided to roll us out effectively enterprise-wide. And that turns, you know, what may have been normally a multi-quarter sales cycle into really under a couple months.
(Source: Box Transcript)
Customers have also been adopting more of the add-on products launched by Box such as Shield. Customers that adopt at least one of Box's add-on products now represent about 54% of recurring revenue compared to 45% one year ago. As companies use more of Box's add-on products, it increases the inertia of switching content management platforms. Companies wouldn't want to risk employee friction in learning to use a new platform, which could lead to business disruption and lost productivity. The use of more add-on products would help Box retain pricing power in future years.
Impact on long-term prospects
The management initially set its sights on achieving $1B in revenue by fiscal 2022/2023. However, they have removed that deadline and created uncertainty on when they will achieve that goal. We expect growth to be roughly 10% for the next 5 years, driven by accelerating digital transformations and companies expanding their usage of Box to most employees.
The company appears to be experiencing some operating leverage as sales growth slows. In fact, the company has experienced an improvement of non-GAAP operating margin by 11% year-over-year to 9.4%. We expect this figure to continue to grow to roughly 25% in 2024 as Box's growth in expenses slows down.
(Source: Investor Presentation)
Valuation
Despite the more than 100% increase in stock price since March, the company's price to sales ratio of 4.16 is not trading at historical highs. For investors who believe in the long term prospects in the company, the current price of Box now appears fair. This is reflected in a price to sales ratio that is towards the middle of its trading range over the last five years.
(Source: Seeking Alpha Data)
Investment Risks
However, Box faces intense competition in its space that may lead to slower customer adoption on its platform. For example, Microsoft (NASDAQ: MSFT) offers free storage options with its Office Suites subscriptions. Even though Box exhibit a slight resemblance of customer switching costs, it is possible enterprises will choose to adopt free SharePoint and OneDrive solution instead of paying an additional vendor like Box.
Another risk for Box could be extended downtime. If it happens, it would lead to business disruption and prevent enterprises from functioning and collaborating normally. This could lead users to lose faith in the platform and lead to increased customer churn. As such, Box has to ensure that it invests heavily to ensure that there is as little downtime as possible. The presence of this risk reduces the switching costs advantage for Box.
Takeaway
Box has steady growth over the years and has room to grow due to acceleration in digital transformation. The company's switching costs could help maintain its competitive position against larger competitors as more companies adopt its add-on products. Box's stock price appears fair relative to its historical trading multiples. Hence, investors who believe in the long-term prospects of the company would not be paying a premium for the company.
This article was written by
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Comments (3)
1. Customer base aquisition. DropBox, Zoom, Slack perhaps? Dropbox would benefit by gaining access to enterprise level cutomers.
2. Technology aquisition. Zoom recently announced hiring a VMware dude and working on encryption. An aquistion of Box would give Zoom or any company desiring to hold a chunk of this space access to encryption already in place and working across muliple platforms.
3. Integration: Video conferencing platforms are already integrating with Box.
4. Other than Facetime, Apple doesn't have an enterprise video conference solution. So what company will Apple aquire? Perhaps a couple of aquisitions to piece the multiple necessary aspects together. What new term will be coined once files/video conferencing are combined? Vitual Desk, One Desk, Apple Desk, Video Desk.