Software stocks suffered significant carnage last week and further tested my plan to target buys of beaten up software stocks this year. With his company caught up in the vortex, Box Inc (BOX) CEO Aaron Levie appeared on CNBC to give his version of an “everyone keep calm” speech. Levie presented a compelling platform-level case explaining the scenario that allows for a thriving software business living in concert with AI (artificial intelligence). Instead of wiping out software companies, AI Agents will make certain software platforms even more valuable.
Importantly, “agents need context”, Levie says. That context resides in software and inside the data in that software. Software platforms that leverage their utility to AI Agents will be able to monetize the agentic layer. Every enterprise deploying AI Agents will need to decide whether to rebuild workflows in a whole new system and develop the required software development core competencies or instead add AI Agents to existing platforms. The software companies helping customers integrate those AI Agents on top of existing platforms will win (Box is taking this approach – see below). Levie points out that companies building from scratch risk having agents “running around and grabbing the wrong information, or answer the wrong question, or produce a contract with the wrong data in it”. They may develop AI Agents predicting what information a user can access only to occasionally decide to give an unauthorized user the wrong data.
Thus, Levie claims that “there will be a wide gap between software built for internal process and enterprise software used to run core systems”, a divide he also describes as non-deterministic versus deterministic work. The customized AI-built software will serve specific, highly risk tolerant, non-deterministic processes. In this scenario, AI Agents become a “boon” for software companies serving customers who realize they do not want to build out a new core competence in AI-driven software development for deterministic workflows. The platforms that contain the data AI Agents need and provide the guardrails to maintain safe operations will become “more valuable over time.”
Of course, start-ups will appear that address emergent gaps as AI Agentic development evolves. However, according to Levie, “the idea that AI takes over software just doesn’t work from a technological standpoint.” And, yes, “technological standpoint” is never static, so there must be a non-zero chance of start-ups eventually upending the entire industry and forcing a complete rethink of enterprise-grade software.
The Answer from Box: Content + AI
Box’s content plus AI model creates a software platform resting on three key pillars: secure collaboration (including AI-driven security), insights generation, and data retrieval. The company next offers its own set of AI Agents which customers can use to automate workflows through the platform’s pillars. Box AI also offers integrations with over 1,500 applications. Box AI was the highlight of last year’s Boxworks convention in San Francisco, CA. The company announced the following launches and features (all direct quotes):
- Box Extract: Unlock Your Data’s Hidden Value
- Transform unstructured content into actionable insights with AI-powered extraction agents that intelligently pull critical data from documents at enterprise scale.
- Box Shield Pro: Enterprise Security for the AI Era
- Protect your most valuable content with AI classification agents and agentic threat response capabilities designed for the age of intelligent automation.
- Box Automate: Orchestrate Intelligent Workflows
- Deploy agentic workflow automation with drag-and-drop simplicity to reduce manual work and accelerate complex business processes that integrate AI agents and teams.
- Box AI Studio: Custom Agents at Your Fingertips
- Create tailored AI agents that tap into your Box content knowledge, enabling everything from contract reviews to instant employee support.
- Box Apps: Smarter Decision-Making Made Simple
- Build no-code apps with AI-powered enhancements that surface insights on demand, featuring custom dashboards and seamless workflow integration.
- Your AI, Your Choice: The Open Platform
- Connect with leading AI models from Anthropic, OpenAI, Google, and more through Box’s flexible platform that integrates with tools like Claude and Microsoft Copilot.
In other words, Box appears quite prepared for AI with a software platform fully AI-enabled. The company is using AI to provide ever-greater value to its customers whether they do custom development or integrate existing platforms.
BOX Now Trades At An Attractive Discount
Last week, BOX accelerated to the downside like so many other software stocks. The stock lost 13.0% last week alone and is down 13.6% for the year. After reporting earnings last month, the stock jumped 6.7% only to slam into stiff resistance from its downtrending 200-day moving average (DMA) (the blue line) and then its 50DMA (the red line). At the time of writing, BOX sits at an 18-month low.
This price collapse plunged BOX into an attractive discount. The stock trades at a discounted 3.2 price/sales. The 20.9 price/earnings GAAP is not heavily discounted from the S&P 500 but still looks attractive relative to the sector average of 32.7. The chart below (from Seeking Alpha) shows how both ratios trade at 5+ year lows. The PEG (P/E over the earnings growth rate) ratio GAAP is a paltry 0.4 and well below the sector median of 1.1 (using Seeking Alpha valuations).
Finally, Box’s free cash flow margin is healthy and relatively stable.
Thus, BOX looks like an attractive way for me to play contrarian to the growing panic in software relative to the AI threat. From management to technology to valuation and financial health, BOX fits well on my expanding shopping list.
Be careful out there!
Full disclosure: no positions
Here are some timely stats on the starkness of the software sell-off from Robinhood “Snacks”:
* Based on data going back to 2001, if IGV has fallen at least 5% over the past month, the SPDR S&P 500 ETF is typically also down between 5% to 6% over the same period.
* Less than 3% of the time does SPY rise at least 1% while software stocks have gotten slammed — 28 instances in total, going back to August 2001 — and three of those are the past three sessions.
* A smattering of once high-flying, expensive software stocks, including Salesforce, Adobe, and Atlassian, have all seen their enterprise value compress to below 5x their estimated sales (from as high as 40x in 2021).
I’ve finally made into the blogs! I was watching ADBE after that recent tumble, but I can’t say it’s something I have faith in being a multi bagger to grow my portfolio. I might have to do some research on BOX.
Excellent. Welcome. 🙂
ADBE is a tough one. Just keep an eye on it. The technicals remain quite ugly. Seems there is no rush there whatsoever.