Box Inc (NYSE:BOX) hasn’t been trading that well, with BOX stock down about 15% over the past month. With that said though, Box is still up close to 50% through 2017. So why does another 20% upside — and possibly more — exist? Let’s take a look.
Compelling Fundamentals for BOX Stock
Put simply, Box has a really compelling business. What was once a file-sharing system subject to commoditization has quickly adapted to the current world of enterprise. The company is leveraging new services and businesses to increase revenue and boost margins. It’s even putting a larger emphasis on machine learning and artificial intelligence.
These are exactly the types of moves we like to see from a software-as-a-service (SaaS) cloud company. Despite the run in the stock price this year, these developments have Box looking cheap compared to its industry peers.
Box has yet to turn in a positive quarter of net income. But many important developments are taking place. For starters, operating margins (OM) are soaring. Although still in negative territory, consider that trailing 12-month OMs were near -75% two years ago. It now sits at -32.9%.
Not compelling enough, right? I agree. But how about the fact that on a trailing basis, Box is now free cash flow (FCF) positive? Along with operating cash flow (OCF), these two metrics have really taken off. That’s a very important distinction among other non-profitable companies.
One more consideration is the growth. Revenue will grow about 27% for this year (fiscal 2018). Next year, sales should grow about 24%. As long as the economy continues to hum along and we get a new tax bill, this number could go even higher. But the pure growth numbers aren’t the total focus.
As losses continue to shrink and margins continue to expand, profitability grows closer. Further, Box Inc should see cash flows continue to gain momentum as margins and sales grow. Do not underestimate the importance of this.
Valuing BOX Stock
Since Box is not yet profitable, using an earnings valuation doesn’t work. On a sales basis, Box trades at less than 6 times sales. That’s actually fairly reasonable given its gross margin of roughly 73% and growing positive OCF and FCF.
In fact, companies like Cloudera Inc (NYSE:CLDR) and Twilio Inc (NYSE:TWLO) sport gross margins in the mid-50% range. Their price-to-sales (P/S) ratio sit at 6.4 and 7.3, respectively. Higher than BOX stock, with negative OCF and FCF and lower margins? That’s not fair, particularly given that revenue growth estimates for next year aren’t much different than Box.
In a way actually, Box sort of reminds me of Salesforce.com, Inc. (NASDAQ:CRM). The two companies have similar gross margin profiles, while CRM has a P/S ratio of 7.5. They companies have similar sales growth profiles as well. Although CRM has a market cap of $75 billion compared to Box’s $2.8 billion, it makes me feel better about BOX’s potential going forward.
So does ServiceNow Inc (NYSE:NOW). The company trades at 12.3 times sales with revenue growth of 38% and 31% this year and next, respectively. Its gross margins are similar to BOX and while its trailing OMs are negative, they’re close to breakeven. On a net income, NOW isn’t profitable, although on an earnings per share basis it is.
In other words, NOW has better revenue growth, OMs and earnings. But is it worth double that of BOX on a sales basis? I won’t say that NOW is overvalued, but it makes me feel that there is value in BOX.
Are these perfect parallels? Not necessarily. This isn’t Ford Motor Company (NYSE:F) vs. General Motors Company (NYSE:GM). But at least I don’t feel like I’m overpaying for BOX stock.
Trading BOX Stock
I aplogize for using a three-year daily chart. Because the same levels we’re at now played a role a few years ago, it was necessary. BOX stock briefly broke below the $20 level, but it has since recovered. This will hopefully be a strong level of support going forward. The second level of support should come into play between $17 and $18, if BOX stock falls that far.
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For me, I would be a partial buyer near $20 and add on a decline toward $17-ish. This company has great growth and should crack $500 million in sales this year. Further, it has a reasonable valuation and compelling cash flow.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held positions in CRM and BOX.
