3 Things That Would Make Morgan Stanley More Positive On Box

Box Inc BOX reported a revenue beat of ~$2M for FQ1 and raised its FY17 revenue guidance by $1M to $391-$395M, implying ~30 percent growth. Morgan Stanley’s Melissa Gorham maintained an Equal-Weight rating for the company, with a price target of $12. The analyst commented that billings growth deceleration and gross margin contraction will likely overshadow the slowdown in opex growth.

3 Core Areas

Analyst Melissa Gorham highlighted 3 core areas to get more constructive on the stock:

#1 - Durability of Top-line Growth: Box witnessed a slowdown in billings growth from 50 percent in FY16 to 9 percent in FQ1, significantly short of expectations. Gorham added that the relationship with International Business Machines Corp. IBM was ramping slowly, and management had indicated no large deals from IBM in the quarter.

#2 - Gross Margin Stability: Box continues to invest in data center capacity, which resulted in gross margin contraction to 72 percent in Q1 from 75 percent in FY16 and 77 percent in 1Q16. Management has projected gross margin expansion beyond FY17, backed by improved delivery efficiencies. The analyst pointed out, however, that it was unclear how much additional capacity would be needed to support growth.

#3 - Operating Margin Improvements: Box reported an improvement in operating margins from (50) percent in 1Q16 to 25 percent in 1Q17. This highlighted “a sharp focus on the path to profitability,” Gorham wrote.