Hidden Value Stocks issue for the third quarter ended September 30, 2020, featuring an interview with Rowan Street Capital’s Alex Kopelevich explaining why he sold his position in Box Inc (NYSE:BOX).
Rowan Street Capital's Alex Kopelevich On Why He Sold Box Inc
The September 2019 issue also featured an interview with Alex Kopelevich, the founder of Roward Street Capital, who liked the outlook for Box Inc (BOX). However, he decided to sell his investment in the company back in December 2019. We recently asked him to explain why:
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“Looking for so-called 'compounding machines' is fundamental to my investment strategy. As part of my methodology, I'm looking for a 'three-part engine' that drives compounding over time. The three elements to that engine are business, management, and the disciplined reinvestment of capital.
As I followed Box for a few quarters following my initial investment, I was no longer convinced that any of the three parts met my investment criteria.
The moat of the business, if there is any, is very fuzzy, and there are signs that this industry is becoming commoditized (Dropbox is in the same boat) with proof of a slowdown in revenue growth rates, despite huge investments.
My industry checks showed me that Microsoft SharePoint is making it very difficult for Box to grow.
I have also grown somewhat disappointed with the management team and their execution.
After 14 Years, Box Still Isn't Profitable
Box was founded in 2005, and after about 14 years in operation, it is still not profitable. The company guided to profitability by FY23, at which point it will be about 17 years old. Here is the kicker, they guided to 15%-20% operating margin on a non-GAAP basis, but there is just one minor detail, their stock-based comp runs at about 20% (very high even for a tech company), and it's not included in the non-GAAP profitability number that management is focusing on.
Is the business going to retain top talent if it stops paying out this much in stock? I don't think so, because it is a real expense. This means they're unlikely to be profitable by the time the company is 17 years old.
With 20% of sales given away as stock-based comp and 41% of sales spent on S&M, they
are only forecasted to grow sales by 12%-18% per year (reinvestment of capital is under a big question mark here).
This doesn't seem like a winning proposition if I was a 100% owner of the company. The theme is attractive, the future of work, AI, and everything, but the economics don't seem to be working out at all.
It's a commoditized industry, in my opinion, with a very tough sell to the CIOs of companies. As such, I think there are better businesses to own than Box.”