Box Breakout? (BOX)

by Dan August 22, 2018 2:21 pm • Trade Ideas

Back in April at the Ira Sohn Investment Conference in NYC, Social Capital founder Chamath Palihapitiya detailed his bullish view on Box Inc (BOX), watch here:

And discussed on CNBC’s Closing Bell right after his presentation:

To summarize, aside from their enterprise cloud storage solutions… Chamath is focused on businesses of all kinds need to leverage their unstructured data, and to that, an organization/ interface layer is needed for this data to be applied to other uses, this is where BOX comes in. Chamath describes BOX’s “skills framework” which is essentially three basic applications: 1. Image intelligence, 2. Audio Intelligence and 3. Video Intelligence that their customers use to assist in their efforts to employ artificial intelligence to make business decisions. The point of BOX’s interface layer is to leverage the tens of billions of dollars of research and development that has been invested by companies like Amazon, Microsoft, and Google to create AI as a service that BOX’s customers can apply to their now structured data.

A good explanation of this was last summer when Jim Cramer interviewed the CEO and Co-Founder of BOX, Aaron Levie on his show Mad Money to discuss how they help businesses structure image data, to unlock value out of their data…

Chamath suggests BOX is a cheap stock and their nascent AI offerings are massively undervalued and one of the best ways to play AI as an investment theme. He goes on to say that their AI biz will have 90% gross margin, with low churn, which will be a great add-on offering to their 80,000 enterprise customers/ 10 million users, making up nearly 70% of the Fortune 500, and resulting in $550 million of recurring revenue.


BOX will report their fiscal Q2 results on August 28th after the close. The options market is implying about a 10% one day move in either direction following the print. The stock has been volatile following results since going public in 2015, with the average one-day post-earnings move of about 6.5%, while the average move over the last four quarters has been about 9%.

Shares of BOX are about 20% since Chamath recommended the stock at the Sohn Conference on April 23rd, which equals the stock’s year to date gains. To my eye, $24ish appears to be an important technical level, meaningful resistance in Nov 2017 and again earlier this year before breaking out to new highs, and since bouncing off a couple times this spring/summer:


So what’s the trade? I have no idea what the upcoming quarter will be like, but given the enterprise spending environment, I suspect it will be fine. But no matter how bullish Chamath or Cramer are on the long-term secular trends for AI offerings for businesses, this company seems like an obvious takeover candidate in the near- term… not exactly near enough in and around earnings, but let me detail a couple trade ideas that could play for a post-earnings pop back towards the prior highs, and one trade idea to play for a $5 billion takeout price or about 8x this year’s expected sales of $610 million.

Defined Risk Earnings Trade Idea: BOX ($25.47) Buy Sept 26- 30 call Spread for $1.10

-Buy to open 1 Sept 26 call for 1.40

-Sell to open 1 Sept 30 call at 30 cents

Break-even on Sept expiration:

Profits of up to 2.90 between 27.10 and 30 with max gain of 2.90 at 30 or higher.

Losses of up to 1.10 between 26 and 27.10 with max loss of 1.10 at 26 or lower.

Rationale: this sort of long premium trade idea falls into the bucket of trades where you better have high conviction has you are risking 4.3% if of the stock price to possibly make up to 11.5% of the stock price if it is up 20%. The break-even on the upside is 6.3%, which the options market says has about a 37% chance of occuring, but only a 17% chance of the stock is at $30 or higher. As we often warn, long premium directional trades into events are a hard way to make money, you need to get a lot of things right just to break even, direction, timing and magnitude of the stock move.


Takeout Trade / Stock Alternative: BOX ($25.47) Buy Jan19 20 / 30 risk reversal for 65 cents

-Sell to open 1 Jan19 20 put at 75 cents

-Buy to open 1 Jan19 30 call for $1.40

Break-even on Jan19 expiration:

Profits above 30.65

Losses below 20.65

Mark to market… as the stock rises towards or above the long 30 call the trade will show gains, as the stock declines towards the short 20 put the trade will show losses.

The most likely outcome is that this trade will be a small loser on Jan19 expiration as the 20 puts only have about a 16% probability of being in the money while the 30 calls have about a 30% probability of being in the money.

But this trade structure offers a little forgiveness on long entry, and if only interested in a takeout well above $30 then this trade offers low risk near-term and potential leverage to a dramatic upside move with little premium outlay. You must be willing to buy the stock at 20, the level you would be put 100 shares per 1 contract short on Jan19 expiration.