Monday was an epic day for equities as we saw the Nasdaq fall over 2%. The move was not widespread, as the hostile headlines were specific to mega-tech companies. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) all fell hard on headlines that U.S. legislators declared war against their business models.
So this made for a difficult setting for bulls coming into last night’s Box (NYSE:BOX) earnings report. Management met their forecasts but still Wall Street hated what they saw. The stock is falling over 17% premarket on the headline, and that creates a problem for investors.
Usually I like it when a stock falls into prior pivot zones, because often these are support on the way down. BOX stock fell into prior bounce levels from December, so in theory I should buy it for a trade — especially since that was a double bottom.
This time it’s different.
Issues for BOX Stock
For fundamental and technical reasons, I suggest you let the BOX earnings dip play out a bit longer before considering betting on a bounce. Let this falling knife hit the floor. Don’t be a hero.
The first problem is fundamental and it comes from last night’s results. The report itself was not terrible, as BOX stock beat both the top and bottom lines. But the concern for me was in the guidance.
Box is a growth stock, yet last night management reduced their revenue guidance. This is like telling investors that management is worried about growth and that they will manage their bottom line going forward.
If that’s the case, then investors need to adjust their valuation for the stock. Wall Street gives growth stocks a pass on profitability … except when they disappoint on growth. So the fact that BOX cut their sales guidance maybe forces the selling to persist a few days.
Add to this an overall sour sentiment on the whole market, and this makes BOX stock a falling machete with a tiny handle. I’d avoid it here, even if 50% off its highs. Not every stock recovers its old glory.
The problem is not with the segment. Our world is going digital and the migration to the cloud is a massive trend that Salesforce.com (NYSE:CRM) started. That trend has years left in it.
The problem for Box is that it has stiff competition. Google is the behemoth and BOX stock isn’t likely to beat it. Then there are the smaller competitors like Dropbox (NASDAQ:DBX). Consensus is that they don’t really cross paths but I suggest that they are both in trouble. There are just too many things going against the fundamentals of the smaller companies for them to thrive.
The second problem that would stop me from catching Box stock here is technical. Stock moves this big are rarely one-day events. Wisdom suggests waiting three days before buying the dip. In this case I’d wait even longer to see the outcome of the battle for the weekly neckline around $15.90.
This is an important zone that the bulls need to hold. If lost, it could trigger a bearish pattern that would target the all-time lows. I know this sounds inconceivable, but Box has already broken below the trend of higher lows that it started in January of 2016. These signs could attract momentum sellers.
I have nothing specific against BOX but I see a several different warning flags that suggest I should avoid this stock for now. I’d rather buy the 8% dip in GOOGL on an extrinsic headline than risking my money on BOX. It will not rally alone, and if Box is rising then so is the whole market. I put the Box stock in the penalty box until management’s tone changes.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room free here.