When Growth Slows, This Trade Can Profit
Box is an enterprise content management platform that solves simple and complex challenges, from sharing and accessing files on mobile devices to sophisticated business processes like data governance and retention.
For more than ten years, the company explains, “Box has made it easier for people to securely share ideas, collaborate and get work done faster. Today, more than 41 million users and 74,000 businesses—including 59% of the Fortune 500—trust Box to manage content in the cloud.”
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You might be familiar with a Box competitor, Dropbox.
Both companies have similar offerings: web-based storage, syncing and sharing for photos, documents, and other files.
But, according to Fortune, Box and Dropbox do have some noteworthy differences. To begin with, there are variations in their pricing plans. But, “the real difference, though, can be plainly seen by viewing each company’s homepage. Scroll through Box’s website and you’ll see multiple tabs — Box for personal, business, and enterprise IT needs, plus information on pricing and a sales contact number.
You’ll also see words like “security leadership” and “scalable.” And the logos of some of Box’s most recognizable corporate customers, including Procter & Gamble and Pandora.
Browse through Dropbox.com, however, and you won’t find any of the above information. There’s just a small sketch of a laptop and mobile device, a big blue button that lets you sign up for an account, and the company’s simplistic tagline: “Your stuff, anywhere.””
The difference is that Box is focused on enterprise customers who care about encryption, integration with other enterprise applications, and which other businesses are using the service while Dropbox’s market is consumers who just want to get up and running with the service as quickly and smoothly as possible.
Given the similarities, it’s easy to confuse the two companies, and that can be a problem for Box, the publicly traded company.
Traders Greet Latest Earnings Report With Sell Orders
Box, Inc. (NYSE: BOX) beat analysts’ expectations with a loss of $0.06 per share. This was lower than analysts’ expected loss and also lower than the loss that management had told analysts they should expect to see. A smaller than expected loss is often bullish.
Revenues came in at $136.7 million, in line with the consensus mark. Revenues were within the range provided by management three months earlier and showed a gain of 7% when compared to the previous quarter and 25% when compared to the same three months a year ago.
But, on the news, the stock sold off, falling more than 23% the day of the report. Traders digging deeper into the report were concerned by several factors.
During the fourth quarter, the company had 82,000 paid customers, up from 80,000 in the third quarter. This marked a slowdown in the growth rate of paid customers and overwhelmed the good news that the paid customers were buying more add-on products.
To counter the slowdown in customer growth, Box is currently working on enriching its cloud content management and artificial intelligence (AI) platforms. It has announced important partnership agreements with industry leaders including Apple and Microsoft.
The company’s rich technology partner ecosystem will continue to be a strong driving force behind its growth and we expect this to continue going forward.
Management guidance was generally below analysts’ expectations. For the first quarter of fiscal 2019, Box expects revenues between $139 million and $140 million. The consensus estimate is for revenue of $143.6 million.
On a non-GAAP basis, the company projects a loss per share in the range of $0.08 to $0.09 cents. The GAAP loss per share is expected be $0.27 to $0.28 per share.
For the full fiscal year, the company expects revenues of $605 million at its mid-point of guidance, well below expectations of $624 million. The lower sales expectations explains the stock’s reaction to the news.
The stock is unlikely to rebound until its operating performance improves.
A Trading Strategy While Awaiting Better News
To benefit from the expected weakness in the stock, an investor could buy put options. But, high prices on put options suggests an alternative trading strategy. The option premium is high because the expected volatility of the stock is high. Options that are based on selling an option can benefit from high volatility.
In this case, with a bearish outlook, a call option should be sold.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that is important to consider is the bear call spread. This trade uses two calls with the same expiration date but different exercise prices. Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call, so this strategy will always generate a credit when it is opened.
The risk profile of this trading strategy is summarized in the diagram below.
Source: The Options Industry Council
The trade has limited up side potential and limited risk. But, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade.
The maximum potential gain with this strategy is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received.
A Bear Call Spread in BOX
For BOX, we have a number of options available. Short term options allow us to trade frequently and potentially expand our account size quickly. Short term trades also reduce risk to some degree since there is less time for a news event to surprise traders.
In this case, we could sell a March 16 $19 call for about $0.35 and buy a March 16 $20 call for about $0.15. This trade generates a credit of $0.20, which is the difference in the amount of premium for the call that is sold and the call.
Since each contract covers 100 shares, opening this position results in immediate income of $20. The credit received when the trade is opened, $20 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $80. The risk is found by subtracting the difference in the strike prices ($100 or $1.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($20).
This trade offers a potential return of about 25% of the amount risked for a holding period that is about two weeks. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if BOX is below $20 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $20 for this trade in BOX.
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