Box Is No Longer A Deal
Summary
- Box looked like a good investment while rumors circulated that the company would likely be acquired or that activist investor Starboard Value would take control of its board.
- Last week PE firm KKR announced a $500 million investment in Box. Box shares immediately dropped 10 percent because a sale or Starboard control became less likely.
- Starboard was pressuring Box to exercise financial discipline, which Box did. That pressure may soon be gone if Starboard sells its shares.
- Box's stock generally gains based on investor sentiment rather than actual company performance. Unless share prices drop substantially, investors, at least for the short term, are unlikely to be all that interested.
- Box's stock has a long history of underperforming, regardless of the company's results. There's little reason to expect that to change now. Any gains in share price will be marginal or short lived.
Box CEO Aaron Levie could almost be called the world's greatest salesman. Get him in a room with the media, private equity firms, technology big shots, or venture capitalists and they'll hand him the world. That is unless they are the types who weigh track records over promises, study spending results, and discover that the ship that Levie is steering could move more smoothly, efficiently and produce better results for investors if different decisions were made. My intention here is not to judge Levie personally, but to look at Box's track record from the day it went public. And the bottom line there is that most people who have invested in Box would have been better off if they invested in something else or left their money in the bank.
Industry analysts may like Box, investors do not
While information technology industry analysts (the kind that advise businesses) who specialize in file management/collaboration and content management have been eager to praise Box, practically since its inception, at least one prominent analyst (who is still high on Box) commented on the KKR investment this way:
Box is no longer a startup. It's a rapidly maturing company and organic growth will only take you so far. Inorganic growth is what will take Box to the next level.” Source: TechCrunch
In the same article another analyst said: “Box very much needs to expand in new markets beyond its increasingly commoditized core business. The KKR investment will give them the opportunity to realize loftier ambitions long term so they can turn their established market presence into a growth story.”
Both suggested that Box needs to grow through acquisitions. But if Box uses a portion of its new money to buy out activist hedge fund Starboard Capital, which owns around 7.5 percent of Box, it will have less money available for acquisitions. If Starboard is out of the picture, Box might go back to its old ways (Box has been more fiscally responsible under Starboard's pressure). So, it's fair to say that the KKR investment is a win for Box's management, but that doesn't necessarily transfer to investors.
It's also worth noting that Box began exploring strategic alternatives with Morgan Stanley (MS) in October of 2019 shortly after Starboard revealed its substantial investment. It took until now that that advice led to action. The deal that Box reached with KKR includes a 3 percent dividend.
It's interesting too that some are speculating that Morgan Stanley didn't find any interested buyers for Box. Investors who follow that train of thought probably won't want to touch BOX unless the share price drops very low. That will remain true for some even if Box releases tremendous results later this spring.
It's worth mentioning that Box almost always exceeds performance expectations, but whatever gains the stock enjoys, they melt away, at least partially, in the weeks that follow.
What is Box's position in the Content Services market?
Some categorize Box as a file-sharing, collaboration solution that competes against Dropbox (DBX) and Google Drive (GOOG) (GOOGL). They label it as the only Enterprise-grade solution in its space. But Box doesn't share their line of thinking. Levie typically compares Box to Content Services vendors like Microsoft (MSFT), Open Text (OTEX), Hyland, and IBM. If that is the case, then Box has at least 16 other Enterprise Content Services vendors as its competition. This is clear during analyst calls. (Note: Microsoft and IBM are partners of Box as well.)
Below: Gartner's Magic Quadrant for Content Services Platforms 2020 which includes Box and all of its competition.
Will Box's new digital signature acquisition be an additional money maker?
In February, Box acquired digital signature startup Sign Request for $55 million. It will be Box(ified) and called Box Signature. Some have suggested that it competes with $412 billion DocuSign (DOCU) or has the same capabilities. That is just plain erroneous. Not only that, but Levie told TechCrunch that "the basic Box Sign function will be built into the (NYSE:BOX) platform at no additional charge;" in other words, it's not expected to be an individual money-maker for Box in the foreseeable future.
A look at Box's recent performance
Box generally surpasses Wall Street revenue estimates. Last quarter was no different. Total revenues were $198.9 million, exceeding Wall Street estimates of $196.6 million. Further, the top line increased 7 percent year over year. Most investors would like to see more than single-digit growth, especially when they are looking to make up for previous losses. Next quarter looks only a little better for Box. CFO Dylan Smith guided Q1 revenue of $200-$201 million in the most recent earnings call, suggesting 9.0-9.5 percent year-on-year growth.
All of this is a bit disappointing given that the pandemic sent the masses to work from home and to collaborate and work with content in the Cloud. Box benefited a bit from the movement, but its stock had nowhere near the growth of other cloud collaboration counterparts like Zoom.
Earnings improved
Q4 fiscal 2021 earnings were 22 cents per share which surpassed predictions by 29.4 percent. This represents a significant improvement since earnings were 7 cents per share in the year-ago quarter. There may have been five large influencers in play: 1) Starboard's call for fiscal efficiency 2) Contracts of longer duration 3) Box selling add-on products to existing customers 4) Turnover of salespeople has decreased 5) More digital sales since there was little to no travel during the pandemic.
The latter four reduced costs of goods sold.
Profitability looks better
It is hard to know whether it's Starboard's influence, the maturation of Box's long-term strategy, or if Box's leadership has learned to curb their spending, but Box's margins and profitability have improved nicely.
Above: Box margin trends
In the fourth quarter, operating margins hit 18 percent on a pro forma basis, as compared to 7 percent one year ago. Looking at that, in isolation, would be a reason to get excited.
Conclusion
It's tempting to buy Box stock if you don't look at its history. At the very least, prospective investors should probably consider that for at least half a decade previous buyers have been certain that the stock is about to break out, and it simply hasn't. Even when all of the signs seemed to be there. Most recently, many thought that Box would soon be acquired so its stock rose quickly. And when it wasn't acquired, the stock price fell sharply. There's no reason to believe it will rise to new heights anytime soon.
But, if you're the kind who has money to play with, plenty of discretionary funds, and are reasonably certain that you are catching Box stock near a low, go for it. But others should be mindful that Box stock is a big gamble - much too risky an investment for your child's college or your retirement fund.
This article was written by
Analyst’s 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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