Box Inc (NYSE:BOX) has attracted a large amount of business in a cutthroat industry. Despite operating in the no-moat cloud computing industry, it has built a platform used by millions across tens of thousands of businesses. However, the challenges BOX faces make success far from a guarantee. The cloud industry’s market conditions, and the company’s financial situation have left holders of BOX stock few options to profit from the company’s platform.
BOX Attracts Customers Amid Tough Competition
BOX provides a content management platform that allows groups to share information in a secure manner. It earns revenue by charging subscription fees for its cloud platform, support packages and other business services.
The company happens to operate in an industry enjoying a massive growth phase. Despite the competition, revenue has grown at a rate of around 20% per year. Moreover, BOX has built an ecosystem used by over 41 million users in tens of thousands of businesses. It also includes an app development system that allows for custom integration. This helps attract customers in what would otherwise serve as a no-moat business.
The no-moat aspects of this business have severe consequences, however. The cloud industry offers low barriers to entry, so intense competition has become the norm. Its offerings place BOX in direct competition with players such as Microsoft Corporation (NASDAQ:MSFT), Oracle Corporation (NYSE:ORCL), salesforce.com, Inc. (NYSE:CRM), VMWare, Inc. (NYSE:VMW) and Dropbox Inc. (NASDAQ:DBX), which recently launched its IPO.
Its size compared to Microsoft or Oracle is not necessarily the problem. Companies such as Intuit Inc. (NASDAQ:INTU) and Square Inc (NYSE:SQ) have thrived facing much larger peers. Where competition hurts BOX most is in terms profitability — or the lack thereof. BOX has not earned a profit since its inception, and analysts do not expect positive earnings in the foreseeable future.
BOX Funds Itself Mostly by Stock Dilution
BOX appears to fund itself by issuing more shares. The volume of shares outstanding has grown by 6 million shares per year in each of the last two years. The BOX stock price stands at a level of around $20.50 per share. That raises most of the cash needed to cover annual losses. Hence, the company can survive for a few more years.
However, stock investors need for the company to thrive in order to benefit from BOX stock. Given the financials and the competition, prosperity for BOX Inc is far from a given. And its dependence on stock dilution to fund itself bodes poorly for BOX stock investors. As a result, the BOX stock price has seen little movement since its IPO in 2015.
Holders of BOX Stock Will Likely Need a Buyout to Profit
As others have suggested, its ecosystem could make BOX stock an attractive buyout candidate. The stock trades at about 5 1/2 times sales. Many investors would consider the company reasonably valued for that reason. However, the BOX stock price stands roughly in the middle of its 52-week trading range. If the buyout offer came soon, BOX stock owners would likely benefit. However, if BOX fell back to (or below) its 52-week low, the benefits become less clear.
Hence, market conditions make BOX stock more of a gamble than an investment. If one feels lucky and cannot make it to a casino, by all means, place your chips on BOX stock. However, those who make that bet will only make money if the timing of the buyout comes at a fortuitous time.
BOX Stock Remains Poorly Suited for the Unlucky
The financial and competitive conditions hamper the potential of BOX stock as an investment. Box Inc has succeeded in building an ecosystem that attracts customers in a no-moat industry. However, a lack of profitability and a funding method built on stock dilution hurt the potential of BOX stock for growth.
Its platform and customer base make BOX an attractive buyout candidate. However, whether that buyout comes at a time that would benefit currently holders of BOX stock remains unclear. For investors with a strong track record of profiting from buyouts, BOX could serve as a great play. Everyone else should look to other stocks to make money in the cloud.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
More From InvestorPlace
- 3 Earnings Beats -- And What It Means for Stocks Still to Report
- 3-Plus Customer-Facing 5G Stocks You Didn't Know About
- 7 Retirement Stocks for the 30-and-Under Crowd
- Short These 3 Tech Stocks (Including Facebook, Inc.)
The post Box Inc Stock Boxed In by Competition and Weak Financials appeared first on InvestorPlace.