Avoid This Slow-Growing Software Stock

Many publicly traded software-as-a-service companies pour cash into sales and marketing to rapidly acquire new subscription customers. Since the revenue from those customers is recognized over time while the costs to acquire them are largely incurred up front, SaaS companies often report big losses as they’re scaling up their businesses…

These losses are not a problem as long as the sales and marketing spending is producing enough new customers, and as long as those customers are profitable for the company in the long run. If you can spend $100 to acquire a customer that will spend many hundreds of dollars with your company for years, it makes sense to run a loss to grow your customer base.

Not all SaaS companies are equally good at translating sales and marketing spending into growth or profits. One company that seems to be having a lot of trouble is cloud content management provider Box (NYSE:BOX). Box slashed costs last year and narrowed its losses in the process, but the company’s growth relative to how much its spending to drive that growth is reason for concern.

Customers are not exactly flocking to Box

Box produced $771 million of revenue in the fiscal year that ended in January, up 11% year over year. In the world of SaaS stocks, that growth rate is near the bottom. SaaS giant Salesforce, for example, managed to grow revenue by 24% in 2020 off a much larger base. Revenue growth was even slower for Box during the fourth quarter, clocking in at just 8%.

Box spent $276 million, or 36% of revenue, on sales and marketing last year to produce that sluggish growth. Salesforce spent 45% of revenue, but it produced much faster growth. Other SaaS companies spend even more but produce impressive growth rates as a result. DocuSign, for example, spent around 55% of revenue on sales and marketing last year, but it produced revenue growth of 50%.

Box appears to have reached the point where simply pouring more cash into customer acquisition isn’t going to generate more customers, at least not in a profitable way. Box cut its sales and marketing spending last year, which reduced its losses substantially, but the company is still not profitable.

Fast growth is one of the main reasons why investors like SaaS stocks. When growth slows down, there better be some meaningful profits. In Box’s case, there’s neither fast growth nor profits.

Box posted a net loss of $43 million last year, down from a loss of $144 million in the previous year. The company is profitable on an adjusted basis and on a free cash flow basis, but those numbers add back the excessive amount of stock-based compensation the company doles out each year. Box booked $154 million in stock-based compensation expense last year.

The company’s guidance doesn’t suggest the situation will…

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