3 Reasons to Avoid BOX and 1 Stock to Buy Instead

Over the past six months, Box’s shares (currently trading at $30.01) have posted a disappointing 10.6% loss, well below the S&P 500’s 11.5% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Box, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Is Box Not Exciting?

Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons you should be careful with BOX and a stock we'd rather own.

1. Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Box’s billings came in at $296 million in Q3, and over the last four quarters, its year-on-year growth averaged 11.9%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Box’s revenue to rise by 7.7%. While this projection implies its newer products and services will fuel better top-line performance, it is still below average for the sector.

3. Shrinking Operating Margin

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Looking at the trend in its profitability, Box’s operating margin decreased by 1.6 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 6.1%.

Final Judgment

Box isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 3.5× forward price-to-sales (or $30.01 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward the most entrenched endpoint security platform on the market.

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