Box Gets Downgraded As Japan's Momentum Unlikely To Sustain Coupled With Threat From Microsoft, Analyst Says

  • RBC Capital analyst Rishi Jaluria downgraded Box Inc BOX from Sector Perform to Underperform and lowered the price target from $28 to $24.
  • Japan drove most of the turnaround, with ARR in the region growing from ~$70M - ~$190M over the past three years (a 40% CAGR vs. a 9% CAGR in the U.S.). 
  • Jaluria credited Box for identifying the opportunity in Japan and investing in channel partnerships accordingly. However, the analyst believes the Japanese market is unique, and this success is unlikely to be repeated in other regions. 
  • Jaluria highlighted that Japan is already 20%+ of the business (vs. <10% three years ago). Box is already highly penetrated within enterprises despite complaining about the price, analyst checks indicated. 
  • Furthermore, Jaluria's checks suggest most of Box's usage in Japan is core storage and file sharing, not Suites, with Shield being the lone add-on with real traction. 
  • Box's turnaround has been impressive, with 2,200 bps operating margin expansion since FY20, growth acceleration led by Suites and Japan, and a buoyant stock return in 2022 (only one in Jaluria's coverage).
  • However, the analyst reserved concerns about the sustainability of this turnaround, especially as checks indicate growth in Japan could continue to slow.
  • Japan has already seen signs of slowing down, with growth slowing in F3Q to 43% YoY cc growth from 50% YoY cc growth in F2Q, and, more worryingly, Japan revenue was roughly flat sequentially (in cc) from F2Q to F3Q.
  • Box has benefited from Microsoft Corp MSFT underinvesting in the partner ecosystem with SharePoint and OneDrive, as well in localization, but now Japanese customers are re-evaluating Microsoft, given strong traction with Office 365/Teams/Power Apps, which could loosen Box's foothold.
  • With already tough competition and a worsening macro (which Box has only seen a limited impact from so far), Jaluria views it as unlikely Box can achieve 15%-17% revenue growth and 25%-28% operating margins in FY25. 
  • The analyst believes investors would poorly receive another change in Box's target model.
  • Price Action: BOX shares traded lower by 6.37% at $27.94 on the last check Tuesday.
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