- The Box IPO is one of the many tech IPOs lined up for 2014.
- Box has solid revenue growth but makes heavy losses.
- Intense competition and potentially high valuations could make it a risky bet.
The recent Alibaba IPO has broken records and reignited investor interest in IPOs. One among the long list of tech companies looking to go public in 2014, is cloud storage solutions provider Box Inc. The company’s public listing has been much delayed considering that it filed for its much awaited IPO way back in March 2014. Since then, the company has also raised another round of funding, as recently as July 2014. While some attribute this delay to the market turbulence that began in April, others speculate that the same might be a reflection of financial challenges that lie ahead for cloud solutions providers in general and Box specifically. Here are 5 things you must know about Box while you evaluate the stock.
BOX Revenue Growth
Stellar growth and heavy losses; it’s a familiar trend with upcoming tech companies and similar is the case with Box. For now, let’s focus on revenue growth.
Box has seen very strong revenue growth during the periods for which data is publicly available. The company recently updated its S-1 IPO filing with the US SEC to include its Q1 (Feb-April 2014) results. Box’s revenue nearly doubled in Q1, growing by 94% YoY (over the same quarter a year ago) to touch $45.3 million.
YoY growth has slowed a little compared with the LTM (last twelve months) average of 104%. However, as the revenue base increases, a slowdown in the growth rate is expected. What’s impressive is that, in absolute terms, the revenue addition has been increasing every quarter with $6.5 million having been added in Q1 2014 over Q4 2013.
Now here’s the worrisome part about Box. Box has been making heavy losses all along, and it’s difficult to estimate when it will turn profitable (even if one were to assume that it will). Not only does the company carry accumulated losses of $399 million, it has also accumulated about $125 million worth of debt. Purely from a financial standpoint, that’s not an envious position to be in.
Though profit margins show significant improvement from earlier levels, operating and net profit margins are still deep in the red and there’s not much clarity on if and when the company will generate sufficient cash flows to fund its growth internally.
Further, given the pricing pressure that cloud solutions providers are facing, it’s unclear how the situation will improve drastically from here. Also, given that Box spent about 105% of revenue on Sales & Marketing in Q1 2014, one would worry that a big pullback in spending could impact revenue growth.
Dual Class Of Shareholders
Now most of us are probably familiar with this arrangement after Google’s recent stock split. Box has two classes of shares, Class-A and Class-B.
What will be issued to investors in the IPO will be the Class-A shares. These entitle the holder of the share to one vote per share held. The Class-B shares will be held by the existing set of investors and those who currently hold outstanding RSUs and stock options, warrants for convertible preference shares, etc. Class-B shares will entitle the holder of the share to 10 votes per share.
To summarize, those who hold Class-B shares will have more control over the company than Class-A shareholders. Is that a bad things? Not necessarily! For those investors who aren’t too bothered about voting, all the other rights and entitlements remain the same. We’ll cover the pre-IPO ownership and changes in classes of shares in more detail in our subsequent coverage of Box.
Box User Base & Competition
Box closed Q1 with 27 million registered users across 240,000 organizations and 39,000 paying organizations. Dropbox which is more of a B2C solutions provider in the same space launched its ‘Dropbox For Business’ enterprise solution in November last year and is just one among a long list of competitors. Dropbox is valued at about $10 billion and has its pockets full after reportedly raising about $850 million since the beginning of 2014.
Apart from relatively newer and smaller companies like Dropbox and Evernote, biggies like Microsoft (MSFT) and Google (GOOG) also have a presence in the cloud storage solutions business. The competition in cloud storage is intense and pricing pressures could be a worry, especially for smaller competitors like Box and Dropbox.
You can look forward to a more detailed coverage of the competition in the sector with pricing comparisons in our subsequent coverage of Box.
Box is reportedly valued at $2.4 billion based on the last round of funding in which it raised $150 million. Since Box hasn’t made any profits, the question of PE ratio doesn’t arise. With its LTM revenue of $146 million, Box valuations translate to a Price to Sales ratio of 16.4.
Box valuations seem quite steep even on a standalone basis. Consider other factors like competition, pricing pressure, profitability (or the lack of it) and the fact that the IPO will actually raise valuations further, Box comes across as a risky investment option.
You can see more such posts about IPOs scheduled for 2015, like DropBox, Uber, Airbnb, Spotify, Snapchat, Pinterest & More.