Box IPO May Not Be Worth The Wait

  • Box IPO is expected to take place in Jan 2015.
  • Competitive pressures are high for Box.
  • The Box IPO is not the most attractive investment option.

After filing for an IPO (initial public offering) way back in March 2014, Box has delayed its IPO for a long time now. However, with its S-1 filing being updated earlier this month, the word is that the Box IPO, is finally ready to hit the road. Box will be one of the first, among many tech companies lined up for a 2015 IPO. With the Box IPO date speculated to be as early as 22 Jan 2015, we listed down a few things you must know, before you invest in this IPO.

Box IPO - Will You Have Control?

We highlighted this is our previous coverage of the Box IPO, Box has two classes of shares, “Class A” and “Class B” shares. Here’s an extract from page 9 of the Box S-1 filing dated 9 Jan 2015.

  • Shares of our Class A common stock are entitled to one vote per share.
  • Shares of our Class B common stock are entitled to 10 votes per share

No points for guessing which shares you’re getting. This is not surprising for those who have seen the Google stock split, which saw the emergence of a class of Google shares with no voting rights. Nevertheless, here’s something you shouldn’t miss.

As Leslie Picker, a Bloomberg IPO reporter, highlighted on Twitter, control rests firmly with existing shareholders, or pre-IPO owners.

If you buy into the Box IPO, you will be given Class A shares, and as the SEC filing explicitly states, holders of Class B shares have nearly all of the control.

“The holders of our outstanding Class B common stock will hold approximately 98.8% of the voting power of our outstanding capital stock following this offering”

A line at the bottom page 49 of the SEC filing helps put things in perspective with respect to ownership.

“If the underwriters exercise their over-allotment option in full, our existing stockholders would own 88.2% and our new investors would own 11.8% of the total number of shares of our common stock outstanding upon the completion of this offering.”

If you like to own companies the traditional way, voting rights and control are likely to be important to you, and if that’s the case, this structure might not appeal to you very much. However, if you prefer to let the management take their own calls, this won’t be so bad.

Box Revenue Growth

Box revenue growth has slowed in percentage terms, which can happen with an increasing revenue base. However, in this case, absolute revenue addition every quarter has slowed in Dollar (USD) terms as well, in the last two quarters. A 70% YoY growth is not bad, but with growth slowing both in absolute and percentage terms, it’s not very confidence inspiring. Of course there’s also the mounting competition, which we will discuss a little later. Box Revenue Growth Chart

Box Profitability

Box profitability has improved significantly compared to corresponding levels in 2013, but what seems a little unsettling is that Box still registers net losses to the tune of 80%. With negative operating cash flows, an outstanding debt of $40 million and competition that won’t allow too much upside to pricing, Sales & Marketing expenses which stood at 97% of revenue in October 2014, will have to be reduced. Then again, it becomes a choice between revenue growth and profitability, and we’ve seen in the past that tech companies have tended to pick the former. Box Losses Chart

Box IPO Valuations

Box valuations have taken a substantial hit with its IPO valuation of about $1.5 billion. Box IPO valuations are down by about 38% from the company’s $2.4 billion valuation in July 2014, following its last round of funding. It’s possible that Box has intentionally priced the IPO at a discount to create demand. We saw the Hortonworks IPO take-off after the IPO was priced at a 50% discount. Undoubtedly, that’s bad news for existing investors and to some extent, for employees who have been recipients of stock based compensations at valuations as high as 17.85 a share. More importantly though, the possibility of a further drop in valuations is a risk that prospective investors have to weigh while making an investment decision. Box IPO valuations of $1.5 billion translate to an LTM (Last Twelve Months) Price to Sales ratio of 7.8. That’s not as expensive as some of the other tech IPOs we’ve seen in recent years. However, it’s not particularly attractive either, given the company’s current financials.

Competition Is A Serious Risk For Box suggests that the Box IPO is timed just right. Not because valuations are at their peak, but because of a host of other reasons, beginning with the improvement in market conditions.

Cloud storage has become a very competitive space characterized by price wars, and as quoted by, Tyler Shields, a senior Forrester analyst, says “The storage, itself, is rapidly approaching a zero dollar value,”

Stiff competition won’t allow Box to jack up prices, making operating costs the only lever for any potential improvement in profitability. Cloud storage companies are believed to be exploring higher margin markets like data management and protection. That said, with the likes of Box, Dropbox, Google (GOOG) and Microsoft (MSFT) among others, chasing the same markets, it’s only going to get more competitive from here. So, this might not be a bad time for the Box IPO.

Box has already cut sales & marketing expenses, from about 145% of revenue in Oct 2013 to 97% of revenue in Oct 2014. But as competition mounts, it appears that things might just keep getting tougher.

Box IPO 2015 - Closing Thoughts

Being one of the first tech IPOs in 2015, the Box IPO is sure to draw a lot of attention. However, all things considered, it doesn’t come across as one of the most attractive opportunities doing the rounds.

If you are considering investments in cloud storage companies, you might also want to see our recent post about the Dropbox IPO. As part of coverage of IPOs due in 2015, we’ve covered the Square IPO, the Pinterest IPO, the Airbnb IPO, the Uber IPO and the Spotify IPO, which we found quite interesting.

Do share your insights about these companies. Whether you love them or hate them, if you have a view, we’d love to hear from you.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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