Box 'Back On Track,' Morgan Stanley Says

In a report published Thursday, Morgan Stanley analyst Melissa Gorham maintained an Equal-weight rating on

with a price target of $20. The company's Q1 results suggest that the core business continues to be strong, and the verticalization strategy seems to be resonating well with the market. Following the disappointing billings growth in 4Q15, the analyst believes that the 1Q results should help alleviate investor concerns regarding slowing growth at Box, in a crowded marketplace. "Q1 results illustrate that Box is sustaining differentiation in the market and making progress towards increased enterprise adoption – in spite of formidable competition," Gorham said, while adding that several incremental growth opportunities lie ahead for the company, such as further platform expansion, with Box Developer Edition driving increased adoption and reach of the company's technology while adding another revenue stream. In addition, the analyst believes that growth could be driven in future by add-on opportunities, such as that offered by encryption key management. "Box is seeing solid early results from its verticalization initiatives, traction in sectors such as the public sector (as illustrated by Box's Department of Justice win) helps sustain growth. While operating margins of (50 percent) came in ahead of our estimate of (56 percent), the full year operating margin remains largely unchanged against a higher revenue target," the Morgan Stanley report stated. On the other hand, continuing heavy losses and increased capex are two areas of concern for the company's free cash flow. However, following the solid Q1 results, Rite Aid has raised its FY16 revenue and operating margin guidance. "While management reiterated its aggressive target of cash flow breakeven by 4QFY17, full year FCF in FY17 will likely remain negative and we don't see operating cash flow break-even until FY18," Gorham added.