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Claustrophobic for Cash: Box Looks Boxed In

By Dan Newman – Mar 25, 2014 at 11:00AM

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Unboxing Box's registration statement reveals many mysteries for the company's future.

The cloud! The cloud! The cloud! That's where we'll put everything. The future looks extremely cloudy, or at least that's what trend reports seem to say about off-site computing services, also known as the cloud. And, cloud-related companies are taking advantage of the hype and making it rain invested capital.

For example, one privately held cloud storage company, Dropbox, recently raised $350 million for a $10 billion valuation.

Dropbox's smaller competition, Box, just released its registration statement prior to its initial public offering. Box hopes to raise $250 million. But your dollars shouldn't be a part of that -- for a few reasons.

Not making any money at IPO-time isn't always a deal breaker, and a bet that a company turns around to become profitable can be a lucrative gamble. But the trend at Box is not moving in a favorable direction:

Source: Box's S-1 Registration Statement.

Currently, Box is spending more than a dollar to generate a dollar. If you're going to make any case for investing, it would be that the future for such a company is unable to be run through a traditional valuation, and would instead be based on the quality of the company and its prospects. As of right now, the financials do not look strong, and the future financials of the company could be very unpredictable -- and would need to change significantly in order to become sustainable.

Quality and prospects raise questions
Since Box's finances look less alluring than magic beans, what factors are in place at the company to shake some golden eggs from the cloud?

Its management team's experience appears sparse. The co-founders, who now serve as CEO and CFO, have no other experience listed outside of some college and a bachelor's degree in economics, respectively. This is because they founded the company when they were both around 20 years old, in 2005. Such youth might give you faith because Box is a technology firm, or it might scare you since neither founder has much other experience to draw on. But to Box's credit, it does seem to be addressing this by appointing a new executive vice president who has experience at SAP and Oracle.

Looking at the competition, Box might have to crane its neck to look at other cloud providers. Dropbox claims 200 million users compared to Box's 25 million. And outside of the pure cloud storage game, Google (GOOGL -1.71%) and Microsoft (MSFT -1.24%) are pushing their cloud storage options, Google Drive and Microsoft OneDrive. While Box must keep a close eye on its cash burn, with only $108 million in cash and its latest quarterly loss above $40 million, the titans can mercilessly hammer down prices in the cloud.

While Box is betting on enterprise customers, other companies offer better value for personal plans. For an equivalent plan of 100 gigabytes worth of storage, Box and Dropbox charge $120 over the year in monthly payments, while Google only charges $24 over the year, and Microsoft charges $50 for the year.

As these cloud storage options combine with word processing and other file creation suites, Microsoft will fiercely protect its healthy and growing revenue streams -- Office 365 being one of them. According to Microsoft's last earnings report, "commercial cloud services revenue grew more than 100% year over year, as customers are embracing Office 365, Azure, and Dynamics CRM Online, and making long-term commitments to the Microsoft platform."

Google's Apps platform claims five million businesses, compared to Box's 34,000, and Google offers a wider spectrum of solutions including Google Drive, Gmail, and its document creation programs.

Low-lying cloud cover
With the cloud all the rage, the market is primed for Box to reap the most it can from an IPO to help fund its growth. And it needs another cash infusion to see if it can flip the switch on losses to profits. However, its cloud services need to break through the looming competitors and begin selling themselves, as sales costs are trending in the wrong direction to reach profitability and a return for investors.

Dan Newman has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. 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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