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.

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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.

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