After a volatile start to the year, there’s nothing like an interesting initial public offering to provide a little excitement. Box Inc (NYSE:BOX), a cloud file sharing company, hopes to generate a good deal of buzz as it starts trading today.
In the first big IPO of 2015, Box had hoped to raise around $150 million with shares priced between $11 and $13 but priced at $14 Thursday evening.
When investors are able to jump on popular IPOs, it can be exciting but scary at the same time. Oftentimes, IPOs are glaring examples of how the game is rigged against individual investors. When a hot new IPO comes to market, only insiders can get their hands on shares at the actual IPO price. The bank backing the offering then hypes it to the moon, driving up investor demand.
Eager investors, who were locked out from the IPO shares, often jump in and buy on the first day of trading, which sends the stock soaring. After the lock-up period expires, the insiders then make a quick exit, pocketing their hefty gains. Demand can dry up, leaving all those individual investors holding the bag.
So, where does Box fit? Is it an exciting opportunity to grab when it starts trading, or is it more likely to go the way of so many others and create as many problems as it does profits?
I’m staying on the sidelines. If you’re thinking purely of a quick trade, you may be able to make a few bucks with BOX stock, but the timing could be tricky. Like the majority of tech IPOs, only a relatively small number of shares (12.5 million) will be offered today.
Looking beyond the early days of trading, I have serious concerns about the company, its competitors, costs and ultimately its profitability. I’m just not confident that BOX will be higher six months from now than where it trades today.
There are certainly positives. When you look at the numbers, Box stock’s growth appears strong. In the third quarter of last year, Box’s revenue grew almost 70% over the prior year.
I also like that it has scale: Box is now compatible with more than 2,300 apps, up significantly from 1,000 a year ago. Box has grown its user base to 32 million and has increased its paying enterprise users from 34,000 to 44,000.
Unfortunately, those positives are outweighed by the negatives, by a sizable margin in my mind:
- Going against the big boys: My biggest concern is that cloud storage has become a very competitive area, and Box is competing with bigger players willing to engage in massive price wars. Competitors include Google Inc (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), EMC Corporation (NYSE:EMC) and DropBox. That pretty much says it all.
- Slowing sales growth: That 70% growth looks good on the surface and is indeed a strong number in and of itself, but if you look at the trend, it is slower growth than prior months and years. It’s not uncommon for the rate of growth to slow with an increasing revenue base, but sales growth has also slowed in dollars the last two quarters, which concerns me.
- Costs too high: Box still registers net losses to the tune of 80%. With negative operating cash flows, an outstanding debt of $40 million and competition that won’t allow too much upside to pricing, sales and marketing expenses, which stood at 97% of revenue in October 2014, will have to be reduced. Yes, almost all of the revenues went to cover expenses. Believe it or not, spending did actually come down in that quarter from being 138% of revenues the prior quarter.
- Lower valuation: Box filed to go public last year, but Box dropped the plans due to the market conditions at that time. The valuation has since come down to approximately $1.5 billion from $2.4 billion last July, when Box raised $150 million in funding.
- Non-voting shares: New investors will be given Class A shares, but holders of Class B shares have nearly all of the control — 98.8% to be exact, according to Box’s filings.
In the end, I’m not thrilled with how Box stock’s revenue ramp seems to be slowing too fast for it to make money. Box should be an insanely profitable business, but the marketing is eating it alive — in a bad period, Box will spend more selling the product than it will bring back in revenue.
The good thing is that once Box makes the sale, the product is insanely sticky. Retention is above 100%. So, enterprise on the platform doesn’t migrate. But that also means maybe one-third of Box’s growth rate comes from upselling existing customers. This implies that Box is hitting more of a wall in terms of adoption, possibly because of the big-time competition out there.
At the moment, it’s hard to see BOX breaking even much sooner than two years from now. Box has cash for about nine months at current levels and will need to cut sales deep to cut that burn. It could also mean secondary offerings down the road, which would pressure shares, as would the lock-up periods for insiders expiring, giving them the freedom to sell.
To me, this is very different than the Alibaba Group Holding Ltd (NYSE:BABA) last September. Alibaba was the largest global IPO in history, and it featured a dominant player in a huge market.
For BOX, those who are able to get their hands on actual IPO shares should do well, and traders looking to get in and out quickly may be able to make a few bucks as well. But I would not recommend you buy BOX with the belief that it will be higher in the coming months.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network, and other media.
