Investing in an IPO can be a great way to get in on the "ground floor" of a promising company. Unfortunately, some hot IPOs are malfunctioning elevators that skyrocket to the top floor before crashing back through the basement. Let's check in on two high-profile tech IPOs that have slumped below their IPO prices, and weigh their chances of bouncing back in 2016.
Cloud service provider Box (NYSE:BOX) went public at $14 on Jan. 23, surged past $23 on its first day of trading, then gradually slipped back below its IPO price. An ongoing concern about Box is that its core cloud storage business could eventually be rendered obsolete by bigger players that aren't shy about offering free and cheap cloud storage to tether more customers to their ecosystems.
Last year, Box CEO Aaron Levie told The Information that cloud storage would likely be "free and infinite" in the future. However, he noted that storage was only a foundation, and that businesses would still pay for top-tier cloud-based collaboration and security features.
Many large companies agree with Levie. Nearly all of Box's 42 million registered customers and 55% of its 4.8 million paying customers are employees of Fortune 500 companies. Box's platform is flexible and can be integrated into popular SaaS platforms. Its retention rate also remains well above 100%, indicating that it isn't losing any customers to bigger cloud storage rivals. Last quarter, Box's revenue rose 38% annually to $78.7 million and beat estimates by $1.9 million.
Box's top line growth looks robust, but it won't post a profit anytime soon. It posted a net loss of $45.4 million last quarter, compared to a loss of $55.1 million in the prior year quarter. Total operating expenses during that period rose 23% to $110 million. Unless Box can reduce those expenses and show some bottom line improvement, its stock could remain stagnant near its IPO price next year.
Twitter (NYSE:TWTR) went public on Nov. 7, 2013 at $26 per share. Its stock soared past $40 on its first trading day, hit the high $60s last January, then plunged all the way back below its IPO price. Twitter's two biggest problems have been its sluggish user growth and its lack of identity.
Back in 2013, former CEO Dick Costolo claimed that Twitter would have 400 million monthly active users (MAUs) by the end of the year, a promise which still hasn't been fulfilled. Last quarter, Twitter's MAUs rose 11% annually to 320 million, down from 15% growth in the previous quarter and 23% growth in the prior year quarter. At that rate, Twitter's growth could peak before getting anywhere close to 400 million.
In the past, Twitter advertisers only paid for Promoted Tweets when users "interacted" with a click, reply, retweet, or favorite. Costolo replaced that model with one which let an advertiser only pay for ads that led to desired interactions, such as adding new followers, conversions on a website, or app installs. Costolo thought the new model would attract more advertisers, but it simply convinced Twitter's existing advertisers to pay less for fewer interactions. That's why analysts now expect Twitter's revenue to rise just 58% in 2015, down from 111% growth in 2014. Costolo also introduced more features like group chats, video, and e-commerce integration, but they only exacerbated Twitter's identity crisis.
Co-founder and former CEO Jack Dorsey returned to lead Twitter in October. Dorsey believes that Moments, which curates event-based content with tweets, photos, and videos into "stories", can spur user growth. By integrating Moments with live videos on Periscope and six-second videos on Vine, Twitter might evolve into a more content-rich platform which would be more appealing to advertisers. Unfortunately, Twitter's stagnant stock price indicates that jaded investors aren't willing to give Dorsey the benefit of the doubt yet.
Will 2016 be better?
I expect Box and Twitter to both have a tough time bouncing back in 2016. To retain its top enterprise customers, Box needs to spend heavily on R&D, which will keep its bottom line firmly in the red. Twitter can't capture more users and advertisers unless it clearly defines itself, and Moments could muddy up that identity. Nonetheless, contrarian investors should see if Box can post bottom line improvement and Twitter can generate higher user growth. Those catalysts could help the stocks eventually climb back above their IPO prices.