Canaccord Downgrades Box On Sporadic Execution

Box Inc BOX spent 40 percent of its revenue on S&M in the first quarter, which doesn't seem justified by the projected growth of 10-15 percent, according to Canaccord Genuity.

The Analyst

Canaccord Genuity’s Richard Davis downgraded Box from Buy to Hold, slashing the price target from $24 to $16.

The Thesis

While management highlighted record attach rates, it was the second consecutive quarter in which Box reported a bookings miss, Davis said in the note.

Management cited operational challenges, while indicating these resulted from delays in the closing of larger and more strategic sales. Spending 40 percent of revenue on sales and marketing expenses isn't justified in view of the projected 10-15 percent growth. Davis believes S&M should be half that amount, and Box should focus on “operational rigor” and introducing bundled suites.

The company also announced plans to replace its global head of sales and to hire fewer new reps this year.

Box was expected to have “sufficiently de-risked estimates” after the miss in the previous quarter, and Davis said it's disappointing to be lowering estimates again. He reduced sales estimates for FY2020 and FY2021 from $702 million to $690 million and from $810 million to $776 million, respectively.

“Box’s fundamental position is too strong for the firm to be executing this sporadically,” Davis wrote in the note.

Price Action

Shares of Box dropped more than 8 percent to $16.47 at the time of publication Tuesday.