Box price analysis: rule of 40 points to overvaluation

Box (NYSE: BOX) stock price pulled back slightly this week as investors refocused on its next earnings report scheduled on November 29. It also pulled back after Dropbox, a top competitor, announced a new wave of layoffs as its business slowed. Box shares were trading at $32, down from the September high of $34. 

Box is a top cloud company

Box is a technology company that provides unstructured data storage solutions to retail and corporate customers. Its main solution is similar to other cloud storage solutions like Microsoft OneDrive, Google Drive, and Apple iCloud.

Box has a relatively simple business model, where it leases cloud storage from Amazon AWS service and then provides it to customers.

Over time, the firm has expanded its solutions as it seeks to woo corporate clients. For example, it has introduced Box Sign, an e-signature solution similar to DocuSign that lets customers sign documents easily.

Box has also introduced security and compliance tools that lets companies share their most sensitive data online. Some of the top companies using this solution are Morgan Stanley, Intuit, and Dubai Air Ports.

Like other companies, it has also invested in artificial intelligence, which lets companies create content in seconds, receive answers instantly, and boost productivity. 

Over time, Box has attracted many companies as customers to its ecosystem. Some of its top clients are firms like AstraZeneca, Airbnb, Morgan Stanley, and Broadcom. It has over 100,000 clients from across the world.

The benefit of having these many large clients is that it helps to reduce churn, which stands at about 3%. However, the challenge is that the file storage industry has matured and most large companies already have their provider. 

The biggest challenge, however, is that Box competes with many large companies like Amazon, Alphabet, and Microsoft that offer more services. As such, many large companies prefer using a single provider for most of their cloud solutions. 

Box business is slowing

Box has done relatively well in the past few years as its revenue rose from $696 million in 2019 to $1.03 billion in the last financial year. 

However, there are signs that its business is slowing drastically. The most recent financial results showed that Box’s revenue grew by 3% in the second quarter to $270 million. Its remaining performance obligation jumped by 12% to $1.2 billion.

Analysts expect that its upcoming financial results will show that its revenue rose to $275 million last quarter from $261 million in the same period in 2023. For the year, analysts see the revenue rising by about 5% to $1.09 billion. 

In its guidance, the company hinted that its quarterly revenue would be between $274 million and $276 million. For the year, its guidance was that its revenue would be between $1.08 billion and $1.09 billion. 

These numbers mean that the company is no longer growing as it used to in the past, a process that could continue.

Box is overvalued

Unlike Dropbox, which I believe is undervalued, Box is a highly overvalued company. It has a forward price-to-earnings ratio of 83, higher than the median estimate of 29. These are huge numbers for a company that is no longer growing.

For example, NVIDIA, which has faster revenue and profitability growth has a multiple of 51. Box has a gross profit margin of 76% and a net margin of 13%, lower than other SaaS companies.

One of the best approaches to value SaaS companies is through the Rule of 40, which involves adding its revenue growth and its profit margin. In its case, Box has a revenue growth of about 3% and a net profit margin of 14%, giving it a rule of 40 figure of 17%. 

This means that it has a long way to go to get to 40. It also means that the company is focusing more on growth than profitability.

Box stock price analysis

BOX chart by TradingView

The daily chart shows that the Box share price has been in a strong bull run in the past few weeks after bottoming at $23.28 on December 11.

It has remained above the 50-day and 100-day moving averages. Most importantly, it has formed a bullish flag chart pattern, a popular bullish sign. 

Therefore, while the stock is overvalued, there is a likelihood that it will have a bullish breakout in the near term ahead of its earnings. If this happens, it could rise to about $35. 

The risk, however, is that the stock is slowly forming a double-top pattern, which could lead to a breakdown.

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