Will Box Be Profitable In 2016?

Investors who got in on the Box IPO last year have been seriously burned as the stock has tumbled nearly 60%. With an operating margin of -70%, it raises the question whether Box (NYSE:BOX) will ever be profitable, or if their business is even viable.

Source: BOX stock price chart by amigobulls.com

So what should we expect from Box Q4 earnings report?

During their 3Q earnings report, the company raised their revenue guidance from about $296 million for the fiscal year ending January 2016 to $300 million. This means we can expect approximately $82 million in revenue, which represents an increase of 30% YoY.

Source: BOX revenue chart by amigobulls.com

Unfortunately, their profitability is lost in their sales and marketing. If you look at the trailing twelve months (TTM) numbers, Box actually carries a nice gross profit margin of 73%. However, the sales, general and administrative costs outweigh their entire revenue leading to a very poor operating margin of -70%. Now although these sales costs are what is driving the company’s revenue, it doesn’t necessarily mean it is the optimal strategy. They try to build a base of paying customers through free accounts which is calculated as part of their marketing expense. Sales have grown through this strategy, but they are still far outspending their top line. To alter the marketing strategy and/or budget would have an unknown effect on the company’s growth and it would almost certainly hinder it.

The one thing that Box does have going for it is their current liquidity situation. They may only have a $172 million book value, but they have $215 million in short-term cash, which exceeds their current liabilities. Combine this with the fact that they only have $40 million in long-term debt and we can see that the company is not strapped for cash. Their balance sheet indicates that they can operate several more quarters with their current strategy before cash will run out.