BOX - Box: A Cloud Software Company With Strong Revenue Growth Potential

2023-05-09 09:42:26 ET

Summary

• Box is a high-growth cloud software company. Its revenue growth will be driven by its platform and security solutions.
• The company introduces new products and product enhancements frequently to stay competitive in the cloud computing market.
• The company's shares can be bought on pullbacks as a long-term investment.

Box (BOX) is a high-growth software company offering customers various solutions in cloud-based content management service. In the last five years the company's revenue has grown at a CAGR of 14.38%, and I expect revenue will continue to grow at a CAGR of mid-teens in the next five years. This would be possible driven by strong demand for the company's high-growth platform and security products. The company's shares have significant upside left for the long term, and growth-focused investors can buy the company's shares on pullbacks.

Box is a cloud-based software company that stores customers' content and offers capabilities such as providing security and developing business applications around this content. The company allows easy access and sharing of this content from anywhere and on any device. With Box, users can collaborate on content both internally and with external parties, and automate content-driven business processes, which help the company diversify its business.

Growth Drivers

Security Offering

Box offers enterprise-grade security features to its customers. The company's security offering is its main growth driver. The company has invested a large sum of money to build strong security features to protect customers from the most pervasive security threats prevailing online. Customers' files that are stored in Box are encrypted thoroughly. The company's information rights management security feature ensures that customers' content are safe through security controls like multi-factor authentication at the time of accessing the content. These high-performance security features beat competitor products by a wide margin and create strong demand for Box's products. The company's Box KeySafe security feature helps organizations implement high standard data security and protection through encryption keys with key usage unchangeable. As a result, tracking exactly why an organization's keys are accessed is easy, and therefore data theft is extremely difficult. This is why KeySafe enjoys strong demand and performs well in competitive environment. I expect the company's security products will drive its long-term revenue growth significantly.

Box Platform

The company's another growth driver is its content Platform-as-a-Service ("PaaS") product, known as Box Platform. This platform helps IT teams and third-party developers build custom content experiences. With Box APIs, organizations can develop their content and manage content deploying key business applications. The benefit of using Box Platform is that organizations can build applications (content) faster and with more efficiency when compared to competitor platforms, without the need of investing money to build their own content management infrastructure. As a result, the company's PaaS platform enjoys strong demand in the content creating marketplace. Box offers its customers the ability to apply machine learning algorithms from Amazon Web Services ( AMZN ), Google ( GOOGL ) ( GOOG ), IBM ( IBM ), and Microsoft ( MSFT ). Use of such algorithms allows organizations to perform image and character recognition functions by eliminating the need to create and manage separate document repositories, for which Box is a leading choice among organizations as a PaaS. The company's PaaS product has the potential to boost its revenue growth meaningfully in the long term.

Competition

Box operates its business in a highly competitive environment. Its competitors include Microsoft, Google, Dropbox ( DBX ), Open Text ( OTEX ), and Pegasystems ( PEGA ). Box competes with these companies on the basis of quality of products offered, superior customer service, and price.

The company's main competitive advantage is that it has built its platform on a cloud-based architecture. As a result, it can rapidly develop and update its services for users. For today's dynamically changing business environment, the architecture is appropriate since it allows the company to use the most up-to-date versions of its solutions at all times. The company's cloud-based architecture offers its clients superior scalability with minimal downtime for them. This ensures their content is always secure and available. The company's another competitive advantage is that content migration is easy to Box with the company's Box Shuttle content migration engine. The engine allows organizations of all sizes to easily migrate their content to Box at low cost, and regardless of source system, after in-depth analysis of existing data on third party source systems. Both these competitive advantages help the company boost revenue growth meaningfully for the long term.

Fourth Quarter Fiscal 2023 Results

The company's revenue for the fourth quarter of fiscal year 2023 came in at $256.5 million, up 10% year-over-year. Non-GAAP net income per share for the quarter came in at $0.37, compared to net income per share of $0.24 in the year-ago period. Net cash provided by operating activities was $92.2 million, an increase of 87% year-over-year. Non-GAAP free cash flow for this quarter was $74.7 million, an increase of 124% year-over-year.

The company delivered strong financial results for the fourth quarter of fiscal year 2023. Top-line increased driven by significant customer wins and product enhancements. Bottom-line increased driven by stringent cost control measures. During this quarter, Box delivered several enhancements to Box Shield, the company's flagship security solution. The product's new Ethical Walls feature offers greater protection from malware attacks. In addition, the company added new authentication and verification controls to its platform with greater protection for clients. The company improved the interoperability between Google Workspace and Box during this quarter. For this purpose, the company released a new feature for the Box for Google Workspace Add-on with several new utilities. These new developments are expected to result in strong revenue growth for the company in the coming quarters.

According to a research report :

According to Market Research Future (MRFR), the platform as a service ("PaaS") market is poised to reach USD 213.68 Billion by 2030, growing at an 18.63% CAGR throughout the review period (2020-2030).

The report suggests that Box's revenue would grow with a strong momentum over the next several years.

I expect the company's first quarter fiscal year 2024 revenue would be in the range of $250 million to $260 million, driven by continued strength in the company's new customer win area. Net income per share is expected to be in the range of $0.25 and $0.35, driven by new product launches by the company, such as Box canvas, and product enhancements. Overall, first quarter results are expected to remain healthy with a beat in the cards.

Valuation

Box's peer group companies include Microsoft, Google, Dropbox, Open Text, and Pegasystems.

(Data Source: Seeking Alpha )

Box is fairly valued compared to its peer group companies. The company's balance sheet consists of cash and equivalents of $428.5 million, and total debt of $576.2 million. The company enjoys modestly steep valuation because it is a high-growth company with 14.38% CAGR growth rate in the last five years. I expect the company will continue to generate revenue growth around mid-teens in the next five years driven by strong demand for its innovative platform for content sharing, application development, and security offering. I expect the company will strengthen its Box platform in the years to come by offering features such as artificial intelligence and machine learning driven content security, and application development driven by intelligent software development tools. I believe the company's shares have significant long-term upside left. The company's shares can be bought on pullbacks for making long-term gain. I expect capital market activities will remain modestly strong going forward driven by subsiding macro pressure.

Box's revenue has grown at a CAGR of 14.38% in the last five years. Assuming that revenue will continue to grow at a CAGR of around 15% in the next five years, I will find out the company's long-term (five-year) share price. The company's trailing 12-month revenue is $990.90 million, and at a CAGR of 15% its beginning-2028 revenue will be $1,993.00 million, or $13.81 per share. In the last one year the company's shares have traded between the price to sales multiples of 4x and 5.50x. I expect the company's price to sales multiple will touch a high of around 4.50x in the next five years, driven by the company's strong growth drivers. Applying a price to sales multiple of 4.50x on the company's beginning-2028 expected revenue per share, I get the company's beginning-2028 share price as $62.15.

Risks

Box is a player in the cloud-based enterprise services market. The market is not as mature as the on-premise enterprise software market. Since the company generates substantially all of its revenue and cash flows from sales of its cloud content management solutions, its success depends on widespread adoption of cloud computing. If the cloud computing market develops slowly than general expectation, the company's revenue growth and profitability could be negatively impacted.

The industry in which Box operates is characterized by rapid technological change, and frequent introduction of new and enhanced applications and services. If the company is unable to enhance its existing services or offer new services for keeping pace with rapid technological change in the industry, its revenue growth and profitability could be negatively impacted.

Conclusion

Box offers its customers highly differentiated cloud content management solutions, which enjoy strong demand in the cloud computing marketplace. I expect the company would be able to grow its revenue at a CAGR of mid-teens in the long term driven by its differentiated products. Growth-focused investors can buy the company's shares on pullbacks as long-term investment.

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