March was the cruelest month for Box Inc. (NYSE: BOX). Between March 2 and March 16, the company’s stock fell by 45% to an all-time low. While clearly a setback for shareholders, Box’s cloud-based model built around data protection has provided some immunity to the coronavirus pandemic.
In the second half of March, the stock price clawed back more than half the loss, and shares traded down just over 9% for the year to date at Friday’s closing bell. When the company came public in January 2015, shares priced at $14, compared to a closing price of just over that on Tuesday. In June of 2018, the stock posted an all-time high of just under $30 a share.
Two events since March 16 have turned the stock and the company’s prospects around. As more than 75% of Americans have been encouraged (or ordered) to shelter in place, Box’s cloud content management platform may have seen some benefit from the stay-at-home economy.
A Deal With a Trillion-Dollar Giant
On March 16, Box announced the integration of its cloud management software with Teams, a Microsoft Corp. (NASDAQ: MSFT) business messaging app. The company also updated its add-in for Microsoft Outlook on mobile and offered new security and identity integrations.
The integration with Microsoft Teams, which became widely available on March 31, enables users to access and share Box content directly in Teams channels or chats. All channel content will be available with the new Box Files Tab. Team level deployment will be available with automated folder creation and permission mapping between Box and Teams.
The new Box add-in for Microsoft Outlook allows users to save email attachments to Box for both iOS and Android. Security enhancements include a single-sign-on capability, support for Microsoft’s two-factor authentication system and other bolt-on extensions coming later this year.
Teams competes head-to-head with Slack Technologies Inc. (NYSE: WORK) in the business messaging app sector, and Box doesn’t lack for competitors either, including Microsoft itself, Amazon.com Inc. (NASDAQ: AMZN) and Dropbox Inc. (NASDAQ: DBX). There are no deep and wide moats for any of these competitors, so those with the deepest pockets have the best chance of surviving. Box products work with all these, but the integration with Teams appears to be particularly strong now.
Clearing the Activist Shareholder Overhang
A week after the deal with Microsoft was announced, Box said that it had reached an agreement with activist investor Starboard Value, owner of 7.7% of the company’s outstanding shares. Starboard acquired its stake last September, and in October, CEO Jeff Smith said a slowing growth rate and poor profitability compared to competitors made Box an attractive takeover target.
Box co-founder and CEO Aaron Levie said at the time that Starboard’s interests aligned with the company’s. Levie told CNBC that Box’s goals were accelerating growth and improving profitability while cutting back on sales and marketing costs in the coming quarters. A sale of the company probably didn’t figure into Levie’s plan.
The deal adds three new independent directors to the Box board of directors prior to the company’s annual stockholders’ meeting in June. In addition, two incumbent directors will not stand for reelection and one incumbent director will retire. The board will be set at nine directors following the 2020 annual meeting.
As part of the agreement, Box co-founder and Chief Financial Officer Dylan Smith gave up his seat on the board but retained his job. Rory O’Driscoll, a partner at Scale Venture Partners, will not stand for reelection, and Josh Stein, a partner at Threshold Ventures, is also set to retire his board seat in June. Jack Lazar, former GoPro chief financial officer, joined the Box board at the time of the announcement.
How Analysts View Box Stock
Of 14 analyst calls, seven are Buy or Strong Buy, six are Hold and one is Sell. The most recent call came just after the agreement with Starboard. A Morgan Stanley analyst raised the stock’s rating from Equal Weight to Overweight but dropped the price target from $18 a share to $16.
The average 12-month price target on the stock is $17.36, reflecting implied upside of 24.6%.
For the current quarter, ending this month, Wall Street expects earnings per share (EPS) of $0.05 on revenues of $183.24 million. Full-year revenues are tabbed at around $771 million. Full-year revenue estimates are about 10% higher than prior year actuals.
In the prior quarter, Box beat on both the top and bottom lines, with revenues coming in at $183.6 million and EPS of $0.07. Analysts expected quarterly revenues of $181.6 million and earnings per share EPS of $0.04.
Comparatively, revenues rose by 12% year over year, deferred revenues increased 13% to $423.8 million and billings increased 19% to $281.9 million. The company still does not post a net profit.
What It All Adds Up To
When the Starboard agreement was reached, managing member Peter Feld commented:
We see a number of opportunities for substantial shareholder value creation and look forward to seeing the Company execute on opportunities to drive profitable growth towards a best-in-class financial profile.
The prime spot for value creation would seem to be tighter integration with Microsoft. Box appears to have carved out a niche for itself in the Teams app that goes beyond the content-from-anywhere model of a cloud management platform.
While the S&P 500 index is down about 20% for the year to date, tech sector stocks are down by 12%. Compared to the energy sector (down 54%), the financial sector (down 32%) and the industrials sector, tech is a decent house in a bad neighborhood. Even consumer staples (down more than 13%) and utilities (down about 14%) are lagging the tech stocks.
Tech stocks like Box are in a better position than most to moderate their losses during the coronavirus infection period. However, Starboard is unlikely to sit around and wait. The hedge fund will want results sooner, not later, or it will push to shop the company. Tightening the relationship with Microsoft may serve that purpose well too.
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