The more competitive the cloud storage sector grows, the more interesting questions it raises. Will the younger, more nimble ventures have the upper hand against their larger competitors? Will innovative products stand against lower prices? Is there still room in the market for rising stars?
This year's new public offerings will be the proving ground. Cloud storage/service company Box announced plans to raise an expected $250 million in its IPO. Similar IPO news is expected from cloud data-transfer company Dropbox, while new data-storage company Actifio has announced a valuation of more than $1 billion after raising $100 million in a March funding round, with eyes on a potential IPO in 2015.
Meanwhile, the more established competitors are busy updating the services they already have. Google has dropped prices for extra Google Drive storage. Microsoft is touting the interconnected abilities of its latest Office 365 features, and Citrix Systems (NASDAQ:CTXS) is developing new apps for Chromebook. These more defensive moves raise a question: Can the little guys pose a real threat to the bigger cloud storage leaders?
VMware and Citrix
According to Box's IPO filing, the company saw revenue growth of 111%, to $124.2 million, for its fiscal year ending on Jan. 31. Despite remaining unprofitable, with losses around $44 million, the company is currently valued at $2 billion. While Box does offer personal services, most of its product offerings focus on business and enterprise IT, highlighting collaboration and data-management capabilities. This places the company in competition with older, larger services like Citrix and VMware (NYSE:VMW), which is owned primarily by EMC (NYSE:EMC).
Citrix, currently trading at around $55, reported January earnings data that placed its EPS at $1.04 for the quarter, $0.06 ahead of the consensus estimate. Price targets are currently converging, including a drop to $65 by Jeffries Group and a boost to $64 by JPMorgan Chase. However, Citrix has suffered recently from shutting down the popular XenApp in favor of XenDesktop, and its mobile/desktop revenue fell 8% in its last quarter.
VMware, meanwhile, is trading around $100 and is expected to release products that will compete more directly with Citrix's XenApp, thanks to acquisitions like mobile data-management company AirWatch, which VMware bought for $1.54 billion. This move, in addition to the growth of its hybrid products, has caused Sterne Agee to raise its VMware price target up to $126 from $97, and CLSA to raise its target to $115 from $99. VMware saw its stock grow by more than 36% last year thanks to "emerging storage" sales, another field that newer ventures tend to specialize in.
Rooting for the underdogs
Into this saturated market come Box, Dropbox, Actifio and others. Tech giants have time-honored methods of dealing with such newcomers: Acquisition or general outspending, and its brother, price-cutting. But no one has shown signs of acquiring these up-and-comers yet -- Hewlett-Packard quickly sunk rumors about a Box acquisition last month. Outspending, on the other hand, only works when it is spent on the right initiatives.
Cases in point: Google may be dropping prices on its expanded storage options, but Dropbox is pushing into all-new territory with apps like Carousel, which are designed to change the way people save and share photos through cloud services. VMware is working on mobile services, but Box's collaboration-focused features have provided phone and tablet compatibility from the start. Acquisitions like Crocodoc are expanding those mobile world services to be HTML5-compatible. And the Boston-based Actifio is offering cloud backups using "golden master" server copies that cut down on file processing times, a simple service that nonetheless offers serious competition to Citrix, EMC, VMware, and others that still use a more traditional multi-copy format for their backup data.
Whether the new cloud storage IPOs will sway tech investors remains to be seen. Companies like Box will need to find revenue streams that pull them into net profit, while services like Dropbox need to prove the worth of consumer apps like Carousel. But in the crowded cloud market, being smaller, newer, and innovative is still a great way to build buzz -- and capture valuable customer interest.
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Tyler Lacoma has no position in any stocks mentioned. The Motley Fool recommends VMware. The Motley Fool owns shares of EMC and VMware. 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.