- Shareholders have suffered significant losses from the Box IPO.
- Their CEO claims that the company's negative operating margin will turn to positive cash flow by the fourth quarter of 2016.
- If revenues continue to climb and Box can turn positive cash flow then it presents a huge opportunity for investors, however timing is important.
Investors who got in on the Box IPO last year have been seriously burned as the stock has tumbled nearly 60%. With an operating margin of -70%, it raises the question whether Box (NYSE:BOX) will ever be profitable, or if their business is even viable.
So what should we expect from Box Q4 earnings report?
During their 3Q earnings report, the company raised their revenue guidance from about $296 million for the fiscal year ending January 2016 to $300 million. This means we can expect approximately $82 million in revenue, which represents an increase of 30% YoY.
Source: BOX revenue chart by amigobulls.com
Unfortunately, their profitability is lost in their sales and marketing. If you look at the trailing twelve months (TTM) numbers, Box actually carries a nice gross profit margin of 73%. However, the sales, general and administrative costs outweigh their entire revenue leading to a very poor operating margin of -70%. Now although these sales costs are what is driving the company’s revenue, it doesn’t necessarily mean it is the optimal strategy. They try to build a base of paying customers through free accounts which is calculated as part of their marketing expense. Sales have grown through this strategy, but they are still far outspending their top line. To alter the marketing strategy and/or budget would have an unknown effect on the company’s growth and it would almost certainly hinder it.
The one thing that Box does have going for it is their current liquidity situation. They may only have a $172 million book value, but they have $215 million in short-term cash, which exceeds their current liabilities. Combine this with the fact that they only have $40 million in long-term debt and we can see that the company is not strapped for cash. Their balance sheet indicates that they can operate several more quarters with their current strategy before cash will run out.
Source: Yahoo Finance
CEO Aaron Levine said he expects positive cash flow by the fourth quarter of 2016. That would be a huge turn of events which would place their incredibly poor operating margin into the green. And considering the company isn’t too leveraged, it can be a quarter of positive earnings assuming the company doesn’t take on any further debt.
However, I believe that even at the current market capitalization of $1.2 billion, Box is under too much pressure to grow their business. In doing so, I don’t think we’ll see a quarter of positive cash flow this year due to more money being pumped into marketing costs. They are trading at about 4.5X sales, which is reasonable for the industry, but Box stock is trading far above its book value. I don’t think this company will get back to a $1.7 billion valuation until they hit $450 million or so in annual revenue, which could potentially happen by the end of 2016. I’d be hesitant on investing in Box as it is a speculative stock, but the stock can be poised for a breakout towards the end of this year or more likely in 2017.