Box (BOX 3.21%) is a cloud based data service that allows its customers to access data securely and efficiently from anywhere in the world. Its main target customers aren't individuals like you and me but rather mega-companies like Coca-Cola and Intuit. To that end, Box is already a success, serving 69% of Fortune 500 companies.
Yet despite serving an impressive customer base, Box's stock is down over 30% from 52-week highs. Investor confidence in Box's management has eroded as revenue guidance and timelines have been missed, modified or thrown out. As we'll see, management will likely need to win back investor trust for this stock to start trading to the upper right.
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Great expectations
True investors aren't just rolling the dice with ticker symbols and taking daily rides up and down the roller trading coaster. Investors are hitching their wagon to real life businesses, and those businesses come with the people who work there -- including the management team. How a management builds its culture, attracts top talent, and achieves its own business goals are all extremely relevant issues in investing.
The topic of hitting business goals brings us back to Box CEO Aaron Levie. Levie previously outlined lofty goals for the company, but those goals have shifted over time. Specifically, the company keeps changing its story on when it will achieve $1 billion in revenue. Two years ago, Box aimed to hit the billion run-rate in Q3 of 2020 -- in other words, $250 million for the quarter. Then in February of this year, Box shifted slightly from a billion run-rate by Q3 2020, to $1 billion total for 2021. Yet a few short months later, in June, the company set aside any timeline to hit $1 billion in annual revenue.
These shifting revenue targets led to Box's stock sell-off, as investors no doubt felt misled.
Making sense of the "less-than-great" reality
$1 billion is just a number -- conveniently round. And a year is just a trip around the sun -- it doesn't directly correlate to anything intrinsically businessy. Why not celebrate the double digit revenue growth Box still has? And shouldn't investors measure business success over a longer time frame than just a year anyway?
While there is some truth to this, the alarming issue is that Box missed its original and revised $1 billion timeline. Two years ago, Box's quarterly revenue was $129 million, up 26% year over year. In that quarter, the $1 billion run-rate target was reiterated and would have been three years from that date. To achieve $250 million quarterly revenue ($1 billion run-rate), revenue would have had to grow 25% annually during those three years. But just one year later, revenue growth slowed to 21% year over year. Revenue growth during the first six months of this year has slowed further to only 16%.
Double digit revenue growth is normally nothing to sneeze at, but sneeze away (gesundheit) because this slowdown was reportedly not anticipated by Box's management. To be clear, management looked at its business and its market and believed 25% annual revenue growth for the foreseeable future was a perfectly reasonable assumption. But management has now been wrong multiple times. That is extremely relevant.
Going forward
It's not all doom and gloom for Box as it is successfully going toe-to-toe with competitors like Microsoft and Intel. In recent earnings calls, management claims to have won over customers switching from Microsoft's SharePoint and Intel's FileNet. By market cap, Box is about 1% the size of Intel, and doesn't even register on Microsoft's chart. Box's ability to compete within its own (cough) "box" is certainly reason for optimism.
Not to mention, the total market that Box is going after is $40 billion big. Box's trailing 12 month revenue is only $655 million, leaving a long growth runway going forward. And it's aggressively going after the opportunity by releasing new add-on products to go with its existing portfolio. This includes the recently announced Box Shield product. Management is calling the product a "major advancement in cloud security" and if true, should help the company continue to differentiate itself from competitors.
Ah, but only "if true". That question is really the issue at hand. Management needs to reestablish credibility with investors. Revenue guidance for the upcoming third quarter is $174 million to $175 million. That narrow range indicates that management is confident in its projection, as it has virtually eliminated any margin for error. If Box hits that guidance on the head, that would be a nice first step in earning investor trust back.
