The Box IPO Is Almost Here – Really!

Despite all the hype, investors should be wary of the deal

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor

Box, which operates a cloud storage platform, is close to pulling off its IPO. The company expects to issue 12.5 million shares at a range of $11 to $13, which would put the valuation at about $1.6 billion. The deal is likely to hit the markets within the next couple weeks and will list on the NYSE under the ticker of “BOX.”

Box185While the timing is pretty good for a Box IPO, investors should still remain cautious.

First, let’s take a look at the history of Box: While at USC in 2004, Aaron Levie got the idea for the company while doing a school project, which evaluated cloud storage solutions. He soon realized that the market was wide open. So he dropped out of school and wasted no time in getting Box launched.

Realizing he needed lots of capital, Levie convinced high-profile investors to write checks, such as Mark Cuban — with a post on Twitter (TWTR), no less — and Draper Fisher Jurvetson. Aaron also worked tirelessly to gin up PR for Box and build a strong brand.

The strategy has certainly turned out to be a winner.  As of now, Box has built a robust enterprise content collaboration system that is fully cloud optimized, with strong mobile features and significant layers of security.

Box Has Delivered Solid Growth

All in all, Box has resonated with customers, which include more than 48% of the Fortune 500 and 22% of the Global 2000. There are currently more than 32 million registered users.

And the opportunity is still large. Box thinks that its addressable global market is a whopping $25 billion. According to the Box S-1: “The size and importance of the Enterprise Content Collaboration market is driven by the fact that information is central to every organization’s workflow, and organizations regularly invest in new ways to increase workforce productivity.”

But there is a big downside — that is, the market has attracted many large rivals like Google (GOOG, GOOGL), Microsoft (MSFT), EMC (EMC), IBM (IBM), Dropbox, Citrix (CTXS) and (AMZN). The result has been a grueling price war for cloud storage. If anything, cloud storage looks more like a loss-leader for large companies to sell other high-end products. No doubt, this should be scary for Box IPO investors, especially since the company has been losing substantial amounts of money.

That price war is perhaps the reason that Box delayed its offering last year.

It’s true that Box has tried to trim its costs — but they remain hefty. During the nine months ended October 31st, 2014, the net losses came to $121.5 million, down by only $3.7 million compared to the same period a year ago. Consider that the company spends about 97% of its revenue on sales and marketing!

Unfortunately, the revenue growth rate has decelerated during this period. For the quarter ended October 31st, the growth was 69%, which was done from 98% during the quarter ended January 31. As should be no surprise, the cutbacks in marketing and sales has had a negative effect.

Granted, the investor environment is still good for the Box IPO. Late last year, there were two cloud IPOs, Hortonworks (HDP) and New Relic (NEWR), that pulled off successful deals, despite revenues below $100 million and net losses.

So yes, the Box IPO could get a nice reception, at least initially. But being a public market can be brutal for those companies that face intense competition, as seen with the huge losses in deals like Millennial Media (MM).

In other words, the Box IPO is probably for investors looking for a quick return, not a long-term play.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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