Box stock on track to become a Q4 winner

• Technically, Box Inc. shares are setting up for a breakout.

• There’s enough fundamental momentum present to drive them on.

• Short of a negative surprise, there’s no reason shares won’t be in the $30 range soon.

A 15% jump in Box Inc. (NYSE:BOX) since the start of the month should tell you everything about the kind of momentum the cloud storage company carries into Q4. Its shares had been under pressure throughout September after forming a dangerous-looking double top over the summer, but there’s a good argument that it’ll test the $30 level again.

While the broader market rally of the past week shows signs of losing some steam, Box Inc. stock will only gather pace. The catalyst for the latest kick came earlier this week when Morgan Stanley upgraded its rating on the company, moving to "overweight" from "equal-weight."

Analyst Josh Baer and his team noted its offerings are "underappreciated" compared to the value they provide, that the company is improving its financials and can close the gap relative to its peers. They slapped a fresh $34 price target onto it at the same time, noting that the company's recent results highlight strong execution and its suite of software products is taking hold.

Getting involved

From where shares opened on Thursday, this suggests there’s at least a 15% upside in the works, and if shares were to hit it in the coming weeks, they’d be logging a 40% rally from the lows of last month. It would also put them at fresh all-time highs and well above the previous two tops that might otherwise have held them back.

In a note to clients, Baer wrote that "recent results demonstrating higher net retention, lower churn and strong large deal momentum, with consistent execution across geographies, customer sizes and verticals, suggest Box's Suite selling and expanding product capabilities are allowing customers to more easily realize the value of the full Box platform.” He did add that the "challenging macro" environment remains a risk for potential investors.

This macro headwind had analysts raising red flags during the earlier months of the summer, although a forecasted deceleration of revenue growth did not materialize in the company’s most recent earnings report.

As with many other tech companies, Box will still need to tread carefully in the coming months as inflation and interest rate readings point north. Overall, the sentiment is positive.

Ahead of its annual BoxWorks event and financial analyst day, Baer added that a large total addressable market, "relatively durable" growth expectations, margin expansions, continued free cash flow support, stock buybacks and "an undemanding valuation" all support a decision to upgrade.

Indeed, the bullish outlook echoed that of the team over at Citi who only last month named Box one of their “favorite opportunities," citing a transformation over the past couple of years following inconsistent performance since its 2015 IPO.

Technical strength

From a technical perspective, there’s a lot to like about the stock right now as the evenings start to get darker. Shares have been setting higher highs and as they move up toward the $30 mark and an obvious tightening pennant continues forming.

This can often be one of the most bullish technical signals out there and points to a decisive breakout on the horizon as the trading range narrows and the stock chooses a definitive direction. There’s enough fundamental and technical momentum behind its shares right now to indicate that this will be a move out and up.

Investors should be mindful that the RSI has gone almost vertical in the past few days and could experience a temporary pullback in the sessions ahead. Any weakness, short of being fundamental based, should be viewed as a buying opportunity in what looks like this Q4 winner already.