Don’t Get Caught in the Boxed Hype!

As you look forward to IPOs from Box and Dropbox, it might be wise to look deeper into their competitive advantage, or lack thereof.

Jul 9, 2014 at 11:00AM

Private cloud storage and file sharing companies Dropbox and Box have attracted big investments from private equity prior to highly anticipated IPOs. While the former is yet to file an S-1 with the SEC, Box's IPO has been postponed more than a few times. As the anticipation builds, Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), and Apple (NASDAQ:AAPL) can provide you with all the due diligence you'll need prior to considering an investment in either of the boxes.

Big expectations and big valuations
Following the most recent rounds of funding, Dropbox and Box now have valuations estimated at $10 billion and $2 billion, respectively. The two companies are very similar, both in cloud storage, with Box known primarily for its enterprise business, while Dropbox has a large presence with all customers.

Unfortunately, little fundamental data is known about Dropbox since it doesn't have an S-1, but we do know it has over 300 million customers with 70% outside the U.S.; this is significantly larger than Box's 27 million registered users. However, we do know quite a bit about the operations of both businesses, including the fundamentals of Box.

Both companies offer storage at a cost based on the amount of gigabytes being used. During the three months ending April 30, Box reported revenue of $45.3 million, good for growth of 94% year over year. While that growth is impressive, the company also reported a net loss of $32.7 million, which was driven by $47 million in sales and marketing alone.

Obviously, there's no way to know for certain that Dropbox's revenue growth and lack of profitability is the same as its peer, but one thing's for certain: Implied valuations suggest high expectations for one company that is far from reaching profitability.

Little hope
Fortunately, you don't really need to know the eventual IPO valuation of either company, or their growth, profitability, etc. In fact, the operational facts of their businesses and their long-term outlooks can be seen clearly through technology leaders Microsoft, Google, and Apple.

Here's a good illustration:

Company

Storage (gigabytes)

Cost per Month

Google

100

$1.99

Apple

200

$3.99

Microsoft

200

$3.99

Dropbox

200

$19.99

It doesn't take a mathematician to see the large disconnect from Dropbox's pricing and everyone else's. Many competing prices have been substantially lowered in the last few months. Therefore, common sense would suggest Dropbox will also have to lower its prices to compete long term. However, when prices get slashed 80%, so does the majority of growth. If prices remain the same, then eventually, users relocate once they become aware of lower prices.

You might be saying, "What about Box? It's not included in that chart!" Well, don't worry, we have a good illustration for them as well.

Company

Storage (terabyte)

Cost per Month

Box

unlimited

$35

Google

1

$9.99

Microsoft

1

$9.99

At first glance, it may seem like Box could have value in its unlimited storage. However, unless you plan to replicate Wikipedia, chances are you'll never get close to 1TB of storage -- 1TB might as well be unlimited. Also, Google, Microsoft, and Apple offer their storage via popular platforms like Drive, Office 365, and iCloud, which further add value to the storage.

Options really are a luxury
The bottom line is that cloud storage and file sharing is no longer a five-company operation; it has grown to where nearly all relevant technology companies have some presence in the cloud, especially storage. Therefore, it is extremely dangerous to get caught in the hype of companies whose sole product is cloud storage. Instead, invest in companies that have storage as an option -- that is, if you're sold on the long-term prospects of the space.

For example, Google, Microsoft, and Apple are among the most valuable companies in the world, with cloud storage almost irrelevant to their overall valuation. Google derives the majority of its revenue through advertising, while Microsoft's operating system and other software like Office drive its fundamental boat.

Foolish thoughts
With all things considered, the best of the best remains Apple despite it trading at 52-week highs. The company's iTunes and iOS operating system have become some of the most prolific platforms in the world, an amazing achievement for a hardware company.

Not to mention, with a 2% dividend yield and the largest buyback program in history, Apple remains the most shareholder-friendly company ever. At less than 14 times forward earnings, there aren't too many better opportunities in technology, and it just so happens that Apple remains a key storage company with far better prospects than either of the boxes.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Brian Nichols owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), 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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