Box (NYSE:BOX) is a cloud-storage and work management platform similar to Dropbox (NASDAQ:DBX) and Alphabet's Google Drive (NASDAQ:GOOG) (NASDAQ:GOOGL), but focused on large enterprises. Since its IPO in 2015, shares of the company's stock have underperformed the S&P 500 and Nasdaq index by a wide margin, leading many investors to disregard the business in favor of more exciting growth names. However, with plenty of new products getting added to the platform and consistent business growth, a turnaround may be in order for Box shares.

Is Box mounting a comeback, or is it primed to underperform the market again over the next few years? Let's take a look.

Cloud icon leaning against a laptop.

Image source: Getty Images.

Box is more than just cloud storage

Box started with its Content Cloud platform, which is the basic (and now commoditized) product of storing and sharing work documents in the cloud. However, since its IPO, the company has acquired and developed numerous other products that integrate into the Box Content Cloud, enhancing the value proposition of the platform. 

One new product, Box Shield, allows users to customize security classifications and apply machine learning to automatically get alerts on potential content breaches and malware attacks. Box Key Safe allows its customers to apply encryption keys to documents in the cloud, which is important for highly sensitive documents from a government or financial institution. Lastly, Box just bought Docusign (NASDAQ:DOCU) competitor SignRequest with the goal of embedding digital signatures within the secure Box platform.

All these features highlight Box's focus on security. Roughly 70% of companies in the Fortune 500 uses Box, and now, with tools like Box Shield, they can trust Box to keep their sensitive data safe.

Box financials hampered by operating losses

Box's woes haven't come from slow or inconsistent sales growth. The company has grown its revenue from $303 million in 2016 to a projected $768 million in its 2021 fiscal year (which ended in January). Profitability, on the other hand, has been a different story. Box has historically high operating losses relative to its revenue, and in its recent quarter still had operating margins of negative 1%. However, because Box has to defer revenue across the length of its customer contracts, its stated profitability is less than what the company is actually generating. Free cash flow has been positive the last few years and reached a record $26.2 million last quarter. 

While investors shouldn't ignore operating margin, free cash flow is more important for Box, as it shows investors the cash actually being generated by the business.

Box valuation

Box trades at a sales multiple of four, a clear discount to its enterprise software peers. And while operating losses have historically been large, it looks like it can have strong free cash flow margins at scale. With a sticky customer base and high gross margins (71% as of last quarter), there's no reason to think Box can't eventually reach 25% to 30% cash flow margins. Taking these factors into consideration, it looks like there is minimal downside risk with Box stock from here unless something materially changes with the business.

The verdict on Box

Box has trailed the broad market for years. In fact, if you bought shares at the IPO in 2015 and held to today, you would still be underwater with your investment. But the stock now trades at a modest valuation, and the business looks stronger than ever. If you believe that Box can continue to grow its customer base and expand its profit margins, there's no reason the stock can't beat the S&P 500 or Nasdaq over the next few years and beyond.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.