Investment Thesis

Box (BOX) is a content management and collaboration software platform. It functions in this incredibly competitive landscape alongside the likes of Dropbox (DBX), Google Drive (GOOG), OneDrive (MSFT), as well as, niche players.

The very competitive landscape Box operates in is reflected in Box’s lackluster revenue growth rates and middle-of-the-road profitability.

Having said that, as far as SaaS companies go, at less than 4x forward sales, it would be difficult to argue that this stock is overvalued.

On the other hand, as we compare Box’s potential with that of Dropbox, I reason that investors are probably more predisposed to profit by investing in its Dropbox rather than Box.

Box - Secure Content Management, Workflow, and Collaboration


Despite Digital Acceleration, Box’s Revenue Growth Rates Are Slowing Down

One would have thought that the digital acceleration we have all come to embrace as the ”new normal” would have translated Box’s secure collaboration platform seeing a once once-in-a-lifetime opportunity to rapidly grow market share, which box estimates to reach $55 billion.

Source: Investor Presentation 2020

In fact, one would have expected that as companies need to adapt to the digital age, its rapidly expanding market could have allowed Box to grow its revenues, even if it had to endure declining market share.

However, the facts keep getting in the way of its potential.

Source: author’s calculations; **high-end company guidance

As you can see above, according to its high-end guidance into Q3 2021, Box’s revenue growth rates are likely to hover around ~10%.

Source: SA Premium Tools

Furthermore, as we can see above, this is not a one-off unimpressive quarter, it’s a far-reaching outlook that sees this once high-growth company reporting mediocre quarter after a mediocre quarter well into fiscal 2022.

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Looking back, it feels like a very long-time ago when Box was reporting plus 20% y/y revenue growth rates. Accordingly, this was last seen back during the quarter ended in March 2019. However, it’s not all bad news for shareholders, as under Box’s hood, there are some noteworthy aspects.

The Carrot for Investors

This enterprise-focused cloud content management platform arguably bats above average for its size:

Source: Q2 2021 Presentation

As you can see above Gartner recognizes Box as a magic quadrant Leader.

Moreover, the opportunity for Box as a unifying management, workflow, and collaboration tool feels close enough to be practically within reach. What’s more, Box guides for fiscal 2024 to hit plus 40% on a Rule of 40, using FCF and revenue growth rates — just within 3-years.

Source: Investor Presentation 2020

Furthermore, Box’s non-GAAP gross profit margins improved to 73.5% in Q2 2021, a nice step up from 71.3% in the same period a year ago (data not shown).

Although, in actuality, is this enough to bring new shareholders to the stock? I don’t believe it is quite sufficient, as it could be too little too far into the future.

Valuation — On Balance Box is Fairly Priced Already

It’s difficult to value Box without comparing it with Dropbox.

Dropbox is not only growing faster than Box, as it eyes up mid-teen revenue growth rates, but Dropbox also posts higher gross profit margins, having finished Q3 2020 with non-GAAP gross profit margins of 80% — in line with the high-end of its long-term target, and meaningfully higher than 73.5% non-GAAP gross margins Box reported over the similar period.

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Source: Dropbox Investor Presentation 2020

Also, as Dropbox looks out towards its long-term its likely to reach higher than Box’s own Rule of 40.

Thus, why should investors be willing to pay 4x forward sales for Box, when investors can pay largely the same multiple for the faster-growing, and more cash flow generative Dropbox?

The Bottom Line

On the one hand, Box has not seen its share price appreciate during 2020, thus leading investors to reason that its stock is undervalued.

However, as go through and appraise its opportunity, particularly in contrast with Dropbox, there’s simply not enough here to attract new shareholders to Box’s stock.

Box will report its Q3 2021 results next week, Tuesday, after hours. Stay tuned.

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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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