Is there still an investment opportunity in Box (BOX), given that the stock is currently trading at about 3% above its fair market value?
While the cloud file-sharing and enterprise collaboration company is still in the midst of extraordinary growth, BOX shares — which have risen 30% year to date, besting the 2% rise in the S&P 500 index — have returned more than 21% just over the past thirty days. At around $27 per share, the stock has surpassed the Street’s consensus 12-month median price target of $25. And the company’s upcoming earnings results, due out Wednesday after the close, has had a lot to do with investors’ excitement.
From my vantage point, it appears that the company’s high valuation (P/E of -23) and long-term outlook is already priced into the stock. And given other valuation metrics such as price-to-book ratio (PB) ratio and lack of cash flow, Box on Wednesday has no room for error. And investors with an appetite for risk, who like the stock and have waited for a better entry point, are more than likely going to get their opportunity Wednesday.
In the three months that ended April, the Redwood City, Calif.-based company is expected to deliver a per-share loss of 8 cents on revenue of $139.62 million. This compares to the year-ago quarter when the loss came to 13 cents per share on revenue of $117.22 million. For the full year, ending in December, the loss of 19 cents per share is expected to narrow for 45 cents a year ago, while full-year revenue of the $605.81 million would rise 19.7% year over year.
Since its IPO, the company has grown revenue at an impressive compound annual rate of 32%. Thanks to the many strategic partnerships it has in placed with the likes of Microsoft (MSFT), IBM (IBM) and Google parent Alphabet (GOOG , GOOGL), among other giants, Wall Street expects Box to grow earnings at an average rate of 26% over the next five years.
Given this expected growth rate, however, the company will be forced to use its cash to continuously improve and invest in ways to build up its suite of data management products to fight off competitors, namely Drew Houston's Dropbox (DBX), which, since its IPO earlier this year, has attained a much higher valuation than Box ($12 billion vs. $3.8 billion) and taken much of Box's thunder.
As a results, Box will be forced to keep up, meaning the robust cash flows often associated with high revenue growth won’t trickle down to the bottom line in the manner value investors might expect. Elsewhere, profit Box’s margins are likely to be pressured by the company’s recent investments in security, compliance and administrative technology. Over time, these may prove to be worthwhile investments. But at today’s valuation, the investment thesis requires careful consideration.