What happened
Week to date, shares of Box(NYSE: BOX) were down 12.3% as of 10:02 a.m. ET on Friday, according to data provided by S&P Global Market Intelligence.
The content cloud manager reported sluggish second-quarter sales growth this week as companies tighten spending budgets in an uncertain macroeconomic environment. But management is seeing some areas of growth that position it well for further gains.
So what
With corporate budgets tightening up, Box has experienced slowing growth throughout the year, and management foresees more of the same through the end of 2023. For the full year, management expects sales to increase just 5% year over year, and even adjusting for currency changes, total growth will come to 8%.
However, Box is seeing some growth shoots from the adoption of artificial intelligence (AI). Businesses have more content than ever, from documents to videos, and are looking for AI solutions to organize it. This spells an opportunity for Box AI, a new product announced in May that uses large language models to intelligently sort through content stored on the platform to respond to inquiries.
It's also a good sign that Box's adjusted gross margin is holding up, especially with sales growth under pressure. Adjusted gross margin ticked up to 76.9% in the quarter, versus 76.2% in the year-ago period, which indicates Box is not seeing competitive pressure negatively impact pricing for its platform.
Now what
Box's free cash flow has increased to $299 million on a trailing-12-month basis, which brings the stock's price-to-free cash flow ratio to 13.8. That is a relatively low valuation even with 6% sales growth.
Box's low valuation explains why the stock has held up despite slowing top-line growth. The shares are up only 3% over the past year, but if the company accelerates sales again in the next few years, the stock could head higher.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Box. The Motley Fool has a disclosure policy.
