BOX - Box falls as RBC downgrades on worries over 'sustainability' of recent turnaround

Box ( NYSE: BOX ) shares fell more than 2% in premarket trading on Tuesday as investment firm RBC downgraded the Aaron Levie-led cloud software company, citing worries that its recent turnaround can continue.

Analyst Rishi Jaluria lowered his rating on Box ( BOX ) to underperform from sector perform and trimmed the per-share price target to $24 from $28, noting that while the company has seen 2,200 basis points of operating margin expansion since fiscal 2020, there is some concern that the strong run can continue, citing a slowdown in checks in Japan.

"Japan drove most of the turnaround, with [annual recurring revenue] in the region growing from ~$70M to ~$190M over the past three years (a 40% CAGR, vs. 9% CAGR in the US)," Jaluria wrote in a note to clients. Jaluria added that Box ( BOX ) deserves credit for identifying the opportunities in Japan, but it's likely that the success will not be repeated in other regions.

Additionally, the growth that was generated in Japan is more than likely tapped out at this point, as the island nation is already 20% of Box's ( BOX ) business, compared to less than 10% three years ago. In addition, the analyst noted that most of Box's ( BOX ) usage in Japan is core storage and file sharing, not the company's lucrative Suites product, and there is already signs of slowing down, as third-quarter growth fell to 43% year-over-year, down from 50% in the second-quarter, and Japanese revenue was "roughly flat sequentially."

The analyst also noted that competition in Japan is expected to increase, including from Microsoft ( MSFT ), which has historically underinvested in the region.

"With already tough competition and a worsening macro (which Box has only seen limited impact from so far), we view it as unlikely Box can achieve 15%-17% revenue growth and 25%-28% operating margins in [fiscal 2025]," Jaluria posited.

Last month, J.P. Morgan upgraded monday.com ( MNDY ) and Box ( BOX ), citing several near-term catalysts for each .

Analysts are universally positive on Box ( BOX ). It has a BUY rating from Seeking Alpha authors , while Wall Street analysts rate it a BUY . Conversely, Seeking Alpha's quant system, which consistently beats the market, rates BOX a STRONG BUY .

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