Box released its latest earnings report last week (Q1, fiscal 2017) and earned at least one downgrade and two price target cuts following that report because the results were mixed. However, analysts in general tend to be bullish on cloud companies, so most aren’t ready to write the cloud storage provider off just yet.
JPMorgan downgrades Box to Neutral
JPMorgan analyst Mark Murphy and team downgraded Box from Overweight to Neutral and cut their price target from $18 to $14 per share. The company’s revenue came in a little better than expected at $90.2 million, while adjusted EBITDA was -$12.1 million. Pro-forma earnings per share were also a little better than consensus, but it missed on billings. Billings growth decelerated to 9% from 50% as a result of shorter durations and the $4 million in early renewals recognized in the previous quarter.
Murphy and team noted that while Box shares have surged 40% since the middle of February when Software stocks began being pressured, and for now, they expect the stock to trade sideways. They like the fact that the company has improved its margins and cash flow faster than they expected and that it keeps expanding its product line, potentially improving stickiness. They also like the current M&A environment for software-as-a-service names.
They see limited room for upside because of the shift in billings terms from the previous multi-year prepayment plan to annual billing, which they said will “understate the reality of the business this year.” Another negative is that the upsell rate plunged from 30% in the year-ago quarter to 19%.
When to get more constructive on Box?
Morgan Stanley analyst Melissa Gorham and team have an Equal-weight rating and $12 per share price target on Box. They saw a lack of “conviction in the durability of growth and margin leverage” in the first quarter results. However, they also note that the company’s churn rate continues to improve, falling below 3% in the first quarter, although the net retention rate decelerated again to 116% from 117% in the previous quarter. They add that the mixed data points stand in stark contrast to management comments with imply a “‘record’ pipeline.”
In order to become more constructive on Box, they want to see more durability in growth on the top line, stability in the gross margins, and continued operating expenditures leverage.
Buy the dip: Canaccord Genuity
Canaccord Genuity analyst Richard Davis and team cut their price target for the company’s stock from $18 to $16 per share, but they remain Buy-rated and said they’d pick up shares on the dip in price.
“Box reported a solid headline quarter, but the moving parts of seasonality and changing billing terms didn’t accurately get into consensus (or our) forecasts,” they wrote in their analysis of last week’s earnings report. “This caused confusion, and when you are a still controversial money-losing company that means one thing: a modest, but still disappointing stock price swoon.”
They see the cloud storage provider as being “far more differentiated than investors comprehend” and note that management did increase their full-year revenue guide by about $1 million. At the high end, this represents a 31% year over year increase in sales. Box also expects to become cash flow positive in the fourth quarter.
Oppenheimer analysts also like the company and maintained their Outperform rating but cut their price target from $21 to $18 following last week’s earnings report. However, they warn that the billings change may take “several more quarters to flush out,” and they don’t expect Box to regain investor confidence until late in fiscal 2017.
Box shares edged higher by as much as 0.69% to $11.73 during regular trading hours on Monday but remain down by about 5% from where they were before the last earnings report.