The Box IPO: Far Worse Than Imagined

Cloud storage company Box is set to go public this year, but its financials paint a frightening picture. Along with intense competition from Microsoft and Google, Box has a real struggle ahead of it.

Apr 18, 2014 at 11:00AM

Cloud storage start-up Box is set to go public sometime this year, with a difficult competitive landscape ahead as it attempts to gain enterprise market share. Box has filed its S-1 statement with the SEC, and for the first time, potential investors got to peer into the financials of this fast-growing company. While there was good reason for pessimism about Box before the filing, the long-term picture looks worse than imagined, especially given the competition from Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG).

The foreseeable future is a long time
The very first risk factor listed by Box in its S-1 should act as a big red flag for investors:

We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future.

Startups like Box are rarely profitable, but there needs to be a path to profitability, and it's clear from the company's filing that Box simply doesn't have one. While revenue is growing rapidly, more than doubling in 2013, losses are growing as well. The company burned through $158 million in 2013, up from a $109 million loss in 2012, and there is no sign that this trend is anywhere near reversing.

The ramping of sales and marketing expenses are major reasons why losses are accelerating, with the company investing heavily in maintaining its explosive revenue growth. Box spent more on sales and marketing in 2013 than it had revenue, and total operating expenses were more than twice the company's annual revenue. While it's difficult to say exactly how big Box needs to be in order to have a chance at sustainable profitability, it's safe to say that it's much larger than it is today.

This poses a problem, because time is not Box's friend. Box only had $108 million in cash at the end of the fiscal year, meaning that the company needs to IPO this year in order to avoid running out of money. Even after Box raises the expected $250 million from its IPO, this buys the company less than two years. After that, with the foreseeable future unprofitable, the company will almost certainly need to raise more cash.

Given the cost of building out its data centers -- especially with about 85% of the organizations using Box's services sticking with the free version -- and the growing spending on sales and marketing, Box's race against time doesn't look winnable. And that's to say nothing of the competition.

A feature, not a product
Both Microsoft and Google have cloud storage products of their own, OneDrive and Google Drive, respectively, and both severely undercut Box on price. But the price is only part of the problem for Box. Both Microsoft and Google treat cloud storage as a feature, not necessarily a product, and they use cloud storage as a way to make high-value services more attractive.

Microsoft's recent push to support non-Windows platforms with the launch of an iPad version of Office is a good example. Editing documents on the iPad requires a subscription to Office 365, and this comes with 25GB of free cloud storage per user for businesses. Not only is Office 365 more appealing now that it natively supports the iPad, but the free cloud storage is icing on the cake. And with the iPad version of Office only supporting OneDrive, it makes little sense for Office users to opt for an alternative cloud storage product.

Google does something similar with its enterprise-orientated services. Google's apps for business comes with 30GB of included cloud storage per user, and adding more is dirt cheap. The main draw are the apps, not the storage, with Google Drive acting as a feature, not the main product.

Pricing isn't even the biggest problem for Box. Any business using either Microsoft Office or Google's apps has little reason to pay for additional cloud storage from a different company. Box is attempting to build additional services, like basic file editing, on top of its cloud storage platform. But this can't match the functionality that Microsoft or Google offers.

The bottom line
Box is on an unsustainable path, and the fact that it needs to IPO this year in order to avoid running out of money is a clear sign telling investors to stay away. With companies like Microsoft and Google bundling cloud storage as an add-on to their higher-value services, it's hard to imagine Box being able to effectively compete.

Cloud storage isn't a game changer: Here's the next big thing
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Timothy Green owns shares of Microsoft. The Motley Fool recommends Google (C shares). The Motley Fool owns shares of Google (C shares) and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers