Box Inc – Thinking Outside the Box
Many investors in today’s day and age spend countless hours dissecting a company’s financial reports before making an investment decision. They tend to use a quantitative method driven by ratios and multiples, highlighting elements such as revenue growth, EV/EBITDA, margin expansion and effective cost management. Many investors overlook the key fact that the qualitative strength of both a good company and business has to be there first, and then the quantitative aspects support their strong qualitative aspects. When a decision is made based off ratios and multiples, an investor may find themselves investing in a good business but a bad company. This tangent has led to the recommendation of Box Inc, as a company that has serious compounding growth potential in the upcoming years.
What is Box?
Box, based out of Redwood California, is a global cloud computing company that operates a content sharing platform, allowing users to share, access, manage and collaborate on content from anywhere on any device, providing a variety of specialized services and features. They operate within a business to business software-as-a-service (Saas) platform, focusing on targeting business needs and implementing new features to optimize their software’s functionality. Focusing on enterprise customers within regulated industries presents significant upside from a business-model perspective, as online file storage is effectively a commodity, with little opportunity to add value.
Their key competitive advantage is the user compatibility, compliance, and high level of information security they offer, assuring privacy for businesses with confidential information or data. This has led to a customer base of over 87,000 customers including 69% of the Fortune 500 companies, in a variety of industries, ranging from healthcare to financial services, and the registration of over 44 million users uploading roughly 1 billion files per month.
Ultimately, the value of a business can be considered as the accumulation of a company’s future cash flows discounted back to their present value using their weighted average cost of capital, as it provides arguably the most accurate valuation of a business. Box has reported increasing free cash flow, growing from negative $1.2 million in 2017 to $61.8 million in 2018.
Box has reported strong and consistent revenue growth with a 30% CAGR since going public, reporting an annual yoy increase of 21.3%, and a 72.2% increase in gross profit margin in the past year. They operate a “freemium” subscription-driven business model, offering a base model with limited features to customers without charge, and generate their revenue through subscription fees that essentially pays for the free members to use the platform. They have a range of rates available to businesses, dependent on the features their customer requires. Through this model, billings growth is over 10% per year.
As revenue has grown the cost of acquiring new customers has also shot up. Box has consistently reported negative EBITDA and net income since their IPO in 2015, frightening many investors. These numbers can be quite deceiving as company management has been aggressively investing in sales & marketing, product development and capital expenditure to support the company’s rampant growth. Box Inc. invests significant cash flow into research and development to sustain their economic moat and enhance its existing platform through constant innovation. They have also invested heavily into direct and indirect sales and free user marketing to acquire new customers to expand and diversify their customer base both from a geographic and sector-focused perspective.
What’s going to drive their growth?
A strong pipeline of new very high margin products to sell to a large and attractive customer base
Box’s commitment to cutting edge innovation has increased product offerings and diversified their potential market, through add on products and fast-paced innovation. Box is aggressively building a robust pipeline of products to launch in the upcoming years to leverage off recent international and domestic momentum. Their products consist of extremely high margin technology-driven offerings and are available to some of the largest and fastest growing businesses in the world, that have the ability to pay for these services. As technology continues to make advances, specifically within artificial intelligence (AI), Box has the opportunity to provide AI solutions to major businesses and integrate offerings with AI services with other tech giants, an emerging trend within this sector. Ultimately, Box has a very sticky product and access to an extremely strong customer base, it is easy to envision an increasingly strong ROI on new product development, building a launch pad for future success.
Expanding and loyal customer base combined with advancing technologies will drive margin expansion and surge average revenue per user (ARPU)
New monetization strategies, such as a new admin console experience and enhancement of the seamless file access, which have low development cost, expand the average revenue per user (ARPU) as customers are spending more to utilize these improved features to optimize convenience and functionality. They are able to take advantage of their leverage over companies as they hold critical data, to push more products and services. Furthermore, Box boasts a churn rate of less than 5% and net dollar retention of 108% resulting in a projected 21% increase in revenue from Q3 2018 to Q3 2019, exhibiting high customer satisfaction and strong lock-in, ensuring stable and consistent cash flows. This is boosted by their integration with other platforms, including Google Suite, DocuSign, and Slack. Additionally, with businesses as their primary target, information security and customer privacy have become a pressing issue for a plethora of companies making their services a highly attractive option for concerned businesses.
In summary, Box is a very promising tech company that is projected to notch significant growth in 2019. Trading at only $20.21 USD currently, there is a significant potential upside.
Before you toss them aside due to lackluster financials, try thinking out of the Box.