I don't recommend that investors blindly follow famous hedge fund managers into stocks (trust me, I've been burned several times!), but I do think it always pays to listen to what the "smart money" is thinking.
One of the best forums for cutting-edge investment ideas is the Ira Sohn Conference, which takes place in New York. At the recent conference, ex-Facebook executive and Social Capital CEO Chamath Palihapitiya pitched his favorite idea, which may may have come as a surprise to some: Box (BOX 0.33%).
Box? Isn't that just a boring old storage company? Didn't it just go public (no, that was Dropbox, a quasi-competitor). For those of you new to Box, here's what it does and why Palihapitiya thinks the stock will be a long-term winner.
Can Box grow as much as Chamath Palihapitiya thinks? Image source: Getty Images.
AI software
Palihapitiya believes Box is one of the best software applications in the new age of artificial intelligence. The winning applications for the next ten years will sit atop advanced cloud computing infrastructure, built with high-performance graphics processing units ("GPUs") and tensor processing units ("TPUs"), and the winners will make sense of all the unstructured data we are now collecting, including documents, spreadsheets, audio, video, and image data. As a widely adopted content-management software platform, Palihapitiya thinks Box is extremely well positioned to be the go-to enterprise software going forward.
That's because Box has:
- A core "sticky" product
- The ability to expand into adjacent verticals, and
- The ability to produce additional features through which it will be able to earn additional revenue.
Trading at only five times enterprise value to forward revenues, Box is also relatively inexpensive compared with many other companies in the enterprise software space. Palihapitiya expects that the company can grow 20-25% over the next ten years as it grows its core service, along with new features it has only begun selling to customers.
A "sticky" proposition
Box was an early mover in the content and file management space in enterprise markets. In its annual report, the company highlights Alphabet (Nasdaq: GOOG), Microsoft, Dropbox, and Canadian software giant Open Text Corporation (Nasdaq: OTEX) as competitors. Those may seem like daunting foes, but Box's cloud-neutral platform (unlike Alphabet and Microsoft) has allowed it to succeed, and it also has an edge in the high-touch enterprise over the more consumer and SMB-focused Dropbox. These factors, combined with excellent execution, has allowed Box to win nearly 70% of the Fortune 500 as customers, and generate very low churn of only around 4%, showing the "stickiness" of Box's software.
But can it grow?
Since much of the story with new tech growth stocks is based on revenue growth, let's look at how Box's revenue growth stacks up, along with its billings growth and net expansion rate.
Billings is a term that incorporates revenue growth plus changes in deferred revenue. When Box sells an annual subscription, most would go into deferred revenue, and only recognized over the course of the contract. That's why many software analysts look to billings as the true measure of new business growth.
Net expansion rate is the amount of expansion from existing customers, which is sort of the tech equivalent of same store sales in retail.
|
Box, Inc. Fiscal Year |
2016 |
2017 |
2018 |
|---|---|---|---|
|
Revenue growth |
39.9% |
31.7% |
27% |
|
Billings growth |
50% |
23.1% |
28.8% |
|
Net Expansion rate |
117% |
115% |
110% |
Data source: Box fiscal year 2018 and 2017 annual reports. Table by author.
Looking at these figures, one may become skeptical as to how much Box can grow, as both revenue and the net expansion rate decelerated over the past two years. However, CEO Aaron Levie is chalking up the lower net expansion rate to landing larger initial new deals (growing off a larger revenue base is a tougher task). That does seem to hold water, as billings have reaccelerated, showing in fact that new, bigger deals are being signed. But could the company really compound revenue at 20%-plus for ten years?
Where growth comes from
Box has two ways to grow: the expansion of its core software, as well as new features. Currently, Box has roughly 58 million registered users, but only 17% of those users are paying subscribers. Of that 17%, roughly 60% come from about 82,000 large enterprises (over 1,000 employees). It's unclear how much of its user base Box could turn into paying customers, but it seems the opportunity is there.
The company has also been rolling out several new and industry-specific features, including:
- Box Drive: a feature that seamlessly connects the cloud and workers' desktops.
- Box Skills: applies that artificial intelligence to content with intelligent labeling, transcribing, sorting, and more.
- Box Relay: a tool that allows enterprises to build custom workflows in Box.
In order to realize the its full potential, existing customers will need to buy into these features. On that front, signs are promising: last quarter, two-thirds of the company's deals over $100,000 included these add-on features.
Interesting AI play
Box is certainly an interesting play on AI and the future of enterprise IT. The company will have to continue to win existing customers in a competitive space and continue introducing value-add new features. Only time will tell if Box can sustain high growth rates for many years, but for tech investors, Box is an interesting idea that certainly belongs on your watchlist.
