- Box is a compelling long-term growth play with multiple growth drivers.
- However, the company’s stock is richly valued compared to its competitors.
- Box is a good business to own for the long term, and long-term investors can buy the stock on dips.
Box's (NYSE:BOX) share price has increased significantly after the coronavirus sell-off in the markets. Box is a high growth company with multiple growth drivers. In the long term, the stock has meaningful upside left. However, in the near term, the stock is expected to stay in a range. The company's security and platform products are its primary growth drivers. Long-term investors can buy the stock during pullbacks to maximize their profit.
Box offers its customers a Software-as-a-Service (SaaS) cloud content management platform. The platform helps organizations manage, share, and access their content from anywhere and on any device. The platform also helps users collaborate on content both internally and externally, develop custom applications, and implement data protection. The platform improves employee productivity and accelerates and automates content-driven business processes. The company's marketing strategy is selling the platform with the full set of Box capabilities.Source: Pxfuel
Box offers cloud content management products for web, mobile, and desktop platforms for developing custom apps. The company's primary growth driver is the security features of its products. The company has invested heavily to protect its customers from most dangerous security threats. Files stored in the Box Platform are encrypted at rest and in transit. Box's IRM (information rights management) feature helps users securely access and manage files by providing control over users' ability to access files. The company's KeySafe product helps users implement higher levels of data security and protection. The company's newest offering, Box Shield, offers real-time prevention of security threats. The product has capabilities that reduce the risk of accidental data leakage. In addition, the product offers features that can detect potential insider security threats by machine-learning capabilities.
The company's ability to provide organizations the power of machine-learning algorithms from leading companies like IBM (IBM), Microsoft (MSFT) and Google (GOOGL) (GOOG) is its second growth driver. This feature helps users perform functions such as image and character recognition, and video and audio analysis without creating and managing separate document repositories.
Box offers its customers a content Platform-as-a-Service (cPaaS) product, known as the Box Platform, which is its third growth driver. The Box Platform helps developers extend the features of Box across applications. Box's easy-to-use APIs allow businesses to create a single source of content. In addition, with the APIs, content can be managed and controlled.
Box Relay, a workflow management platform, is the company's fourth growth driver. Box Relay helps simplify workflow in the enterprise and automate content-centric processes in the enterprise. Box Relay doesn't have any code user interface, which allows users to create their workflows easily and effortlessly. The product supports both sequential and parallel workflows and various multi-step processes.
The cloud content management market is highly competitive and subject to frequent introductions of new products and services. Barriers to entry in the cloud content management market are low, and many of the areas in which Box competes evolve rapidly with changing and disruptive technologies. Box faces competition from an array of technology providers, such as traditional cloud content management companies, newer mobile enterprise companies, simple file sync and share companies, and social collaboration companies. The company also faces significant competition from competing platforms developed for SaaS cloud content management.
The company's primary competitors are Microsoft, Google, Dropbox (DBX), and Open Text (OTEX). Box competes with its competitors based on enterprise-grade security and compliance, ease of user experience, price, customer support, and speed, availability, and reliability of its service. The company's ability to remain competitive depends on its ongoing performance in the areas of core technical innovation and product development.
Fiscal First Quarter 2021 Results
Box's first quarter fiscal year 2021 revenue came in at $183.6 million, up 13% from the year-ago period. The company's billings for the first quarter of fiscal year 2021 came in at $128.1 million, up 8% from the year-ago period. Non-GAAP net income per share in the quarter was $0.10, compared to a net loss per share of $0.03 in the year-ago period. The company's free cash flow in the quarter was $39.8 million, compared to $13.4 million in the year-ago period.
The company delivered strong results in the first quarter of fiscal year 2021 amid a challenging macroeconomic environment. These results were driven by remote work and digital transformation strategies of organizations during the COVID-19 pandemic. With the COVID-19 pandemic still in action, Box's fiscal year 2021 results are expected to remain strong and resilient. The company's CEO Aaron Levie said:
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.
If Box can really contribute in building digital-first workplaces for companies, its revenue will grow significantly in the coming months and years.
Box's peer group includes Microsoft, Google, Dropbox, and Open Text. Box's non-GAAP forward PE multiple is 38.49x, compared to Microsoft's 33.10x, Google's 33.95x, Dropbox's 30.90x, and Open Text's 16.06x. Box's trailing 12-month price to sales multiple is 4.03x, compared to Microsoft's 10.36x, Google's 6.00x, Dropbox's 5.38x, and Open Text's 3.88x. Box's trailing 12-month price to cash flow multiple is 36.56x, compared to Microsoft's 24.58x, Google's 18.31x, Dropbox's 17.96x, and Open Text's 13.02x.
Box is richly valued compared to its peers. The company has an ordinary balance sheet consisting of $267.97 million of cash and $470.38 million of debt. The company is richly valued because of its growth drivers. The Box Platform is a PaaS product with high level of security. In addition, the company's KeySafe and Box Shield products offer better quality of data protection compared to many of the competitor products. Box global chief information security officer Lakshmi Hanspal said:
Today's competitive environment demands greater alignment between security and business. Box Shield brings adaptive security controls and threat detection directly to workflows in Box with easy-to-use, built-in controls that help reduce risk and empower the business to work more collaboratively all over the world.
These products are enjoying growing adoption in a continuously growing market. These products, plus the company's other solutions mentioned in the Growth Drivers section, will drive its revenue growth higher in the next five years.
Box is a high growth company. In the last five years, its revenue has grown at a CAGR of 18.82%. I believe revenue will grow in mid-teens in the next five years. The company's trailing 12-month revenue is $716.9 million. If revenue grows at a CAGR of 15% in the next five years, its mid-2025 revenue will be $1,442 million, or $9.40 per share. In the last one year, the company's stock has traded between the price to sales multiples of 2x and 4x. Applying a price to sales multiple of 4x on the company's mid-2025 revenue per share, I get $37.60 as its mid-2025 share price. If the price to sales multiple rises more, the share price will also rise more.
For improving the company's operating results, it is required that Box's customers renew their subscriptions upon expiration of existing subscription. Box's retention rate was high, although it has decreased over time. Retention rate may decrease due to many reasons, such as customers' satisfaction or dissatisfaction with the company's services, the performance of the company's partners and resellers, and the company's pricing vis-à-vis the pricing of competitors' products and services. If Box fails to drive retention rate higher, its revenue growth and operating results may be negatively impacted.
Box sells its products to U.S. federal and state and foreign government customers, which is subject to additional challenges and risks. Selling to government customers requires significant time and expense, with no guarantee that these efforts will result in a sale. Government entities may have legal rights to terminate contracts with Box. The termination could occur due to a default or for their (government) convenience, which may negatively impact Box's revenue growth and operating results.
Box is offering its customers the tools for digital transformation in these challenging and unprecedented times. Organizations are embracing digital transformation like never before, and this is an opportunity for Box to grow its revenue. I believe the company will be able to capitalize on this opportunity with its strong product portfolio and efficient management team. Box is a good business to own for the long term.
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