Box: KKR's Investment Is A Positive Long-Term Signal

Summary

• Shares of Box have cratered ~10% on news of a $500 million preferred stock investment led by KKR.
• The markets took the news as a sign that Box won't be acquired anytime soon, which is the scenario that boosted the stock in March.
• Even standalone, Box is a very attractive software company trading at <4x forward revenues.
• Though growing only in the high single digits/low teens, Box's recurring revenue business and tremendous margin gains are valuable.
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These days, value keeps getting harder and harder to find in a market that keeps chasing new all-time highs. The top end of the market - that is, the most expensively valued stocks - have taken a hit since late February, but even so, most tech stocks appear out of buying reach.

During the boom years for tech stocks, 2019 and 2020 especially, investors chased the most exciting narratives and pumped money into the hottest new IPOs. But now, with the markets seemingly jittery over valuations and all-time highs, investors are more willing to spring for the canaries in the coal mine.

Box (NYSE:BOX) is one such name. Box has been a dog in the stock market in the six years it has been public (the stock has gone virtually nowhere in those years, while most tech stocks have literally multiplied). A bit of hope sparked in March, when rumors circled that investor Starboard Value would push Box to sell itself. Those hopes were quickly dashed in April, when Box announced it was taking a $500 million convertible preferred stock investment from private equity giant KKR. The company is, in turn, using these funds to buy back stock. The markets took this move as a signal that a sale won't happen anytime soon, and Box shares have slid ~10% since:

Data by YCharts

In my view, the dip presents a fantastic buying opportunity in a perennially under-appreciated stock. Box may not be a great investment in a bull market, but in my view it's an excellent play for a "sideways market" (which is my base-case view for the rest of 2021) in which value stocks are getting the majority of the attention.

There are a number of reasons that Box is such an attractive play. First off, unlike most other deep-value stocks, Box isn't a legacy software company whose technology is in the gutter. Box is a fierce innovator in the file management and collaboration space: its AI capabilities, branded as "Box Skills", helps companies navigate and search their content - even for data that isn't easily indexed, such as images.

It should also be emphasized that despite the general consensus that Box plays in a very heavily competitive space against offerings that are very popular for consumers, Dropbox (DBX) and Google Drive (GOOG), Box is the only offering that markets itself as enterprise-grade. The company touts both its AI and collaboration capabilities alongside advanced security to give it an edge over its more retail-focused competitors. We note as well that Box estimates its market size at $55 billion (which means Box's current ~$845 million annual revenue is only 1.5% penetrated into this overall market), indicating that there is plenty of room for a Coke-and-Pepsi situation with multiple large incumbents.

Lastly, Box is driving its focus toward profitability. Earlier on in its IPO, Box was famously referred to as a "money losing house of horrors," but in recent years as Box's growth has slowed, management has turned its attention to taking advantage of sky-high gross margins and drawing on sales leverage in order to boost its bottom line and cash flow. In a value-oriented market, this gives Box a unique edge over expensive, money-losing growth stocks.

Value is the lynchpin of the bullish thesis for Box. At current share prices near $22, Box has a market cap of $3.47 billion and an enterprise value of $3.17 billion, which represents a 3.8x EV/FY22 revenue multiple versus Wall Street's FY22 (current calendar year) revenue expectations of $844.9 million (+10% y/y).

With Box trading at such a below-market value, we like the inherent acquisition optionality in the stock (buyers seem to be circling around value tech stocks: Thoma Bravo bought Talend (TLND) last month at a ~6x revenue multiple). But we don't need an acquisition scenario for an investment in Box to work out, at least not immediately.

Take advantage of current volatility in Box shares to pick it up at a discount and at great value.

Q4 download

Let's now cover Box's most recent quarterly results in greater detail. The Q4 earnings summary is shown below:

Figure 1. Box Q4 resultsSource: Box Q4 earnings release

Box's revenue in Q4 grew 8% y/y to $198.9 million, beating Wall Street's $196.6 million (+7% y/y). Though revenue slipped to the high single digits, Box's billings were stronger: up 10% y/y to $310.1 million. It was a huge billings quarter for Box, with the >$100 million in excess over revenue padding the company's deferred revenue balances. It sets the stage for a stronger 2021: Box has guided to Q1 revenue of $200-$201 million, representing 9.0-9.5% y/y growth (considering Box's history of guiding a point or two below actuals, we think a return to double-digit growth is likely).

Additional products, cross-selling opportunities, and expansion deals within the current install base are an important driver of growth for Box going forward. One of the key opportunities for 2021 is e-sign: later this year, the company is rolling out a DocuSign (DOCU) competitor called Box Sign, stemming from its tuck-in acquisition of a company called SignRequest. Per CEO Aaron Levie's prepared remarks on the Q4 earnings call:

Just last month, we acquired SignRequest, a leading cloud-based electronic signature company to develop Box Sign, our new e-signature capability that will be natively embedded in the Box. Every day, more and more transactions are moving from paper-based manual workflows to the cloud. E-signature is already a multi-billion dollar market and it’s still in the earliest days with digital transaction just beginning to become critical in every industry.

When we surveyed hundreds of our customers in 2020, e-signature was the most-requested new Box capability. There are an incredible number of use cases that Box Sign will address for our customers. For example, legal teams will be able to create and finalize contracts within Box, from drafting and co-editing to signing and retaining the agreement with Box Governance. HR teams will be able to initiate and complete offer letters using Box Relay together with Box Sign. Sales teams can initiate digital customer contracts for signature right from Salesforce and compliance teams will be able to retain and protect executed agreements while securing sensitive content with Box Shield.

Box Sign is expected to be generally available in the summer of 2021. It will be integrated in the Box’s existing subscription plans with additional levels of functionality being available in our enterprise plans and Suite offerings."

Given the high multiples of other companies in the e-sign business (DocuSign in particular, but Adobe (ADBE) as well), we hope the addition of this popular category can help to nudge sentiment on Box higher.

Profitability has also been trending dramatically higher for Box. Operating margins in Q4 hit 18% on a pro forma basis, up 11 points from 7% in the year-ago quarter, for the full year FY21, Box's 15% pro forma operating margin trounced the 1% margin from FY20.

Figure 2. Box margin trendsSource: Box Q4 earnings release

Box is primarily doing this through the natural sales leverage that comes from its recurring-revenue business. As a greater mix of its revenue comes from renewals and expansions, sales dollars spent per dollar of revenue dwindles. As seen in the chart below, Box has driven double-digit reductions in sales and marketing spend as a percentage of revenue in two of the past three years, including last year:

Figure 3. Box sales efficienciesSource: Box Q4 investor presentation

Key takeaways

I think Box has a collection of strong bullish drivers. From a fundamental perspective, on top of existing profitability gains, Box also has a top-line growth driver in e-sign. From an investment standpoint, the stock's <4x forward revenue valuation is a positive draw in a value-focused market and may continue to fuel acquisition hopes. Stay long here.

Analyst’s Disclosure: I am/we are long BOX. 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.

Comments

[Gadzman_33]

I say drop the box to create one company ? dead 💀 money for rest of year IMO .

[zebozebo]

As a customer, one thing I can add that hasn't been talked about publicly to my knowledge, I learned Box recently signed up with Gong to supercharge their sales productivity. For those not familiar, it is worth checking out on YouTube the technology Gong brings to sales teams. I think it could lead to a decent surprise in sales within the next 12-18 months.

I can also say that in my 6 years as a Box customer, I have never seen them more focused on properly marketing add-on features while I'm using the app. Their sales team proactively reaches out to me to be a resource and promotes upgrading to the next level based on our goals for the future. It all feels like a different environment than I'm used to with Box. My account reps presentation to me about the next level up was extremely professional and well prepared, showing me relevant user and account usage stats.

Box Sign will be big. I think it will encourage their cheapest business customers (like us) to upgrade to business plus (doubling our spend on Box) because it offers unlimited external users. PDF signature is so practical for all companies, even those with minimal collaboration needs with customers, partners, and vendors.

I implement cloud technology for a small business (~60 employees). We get the best bang for the buck from Box. It's recent integrations with Google Drive and the great out of the box Salesforce integration prove Box's viability as a neutral party in the ecosystem.

I'm bullish as a customer and investor. I also like Dropbox, by the way! Similar story and value proposition there too!