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Wed, February 8 at 8:00PM ET

Box IPO: It Could Be An Investor Trap

Box Inc, (NASDAQ:BOX) which operates an enterprise cloud platform for storage and collaboration, pulled off its IPO today. The company issued 12.5 million shares at $14 each, which was above the range of $11 to $13.

box inc-box-stock-185And so far in today’s trading, the BOX stock is up about 68%. But as I’ve noted at the IPOPlaybook.com, investors need to be wary of this deal.

Now there certainly some positives to the Box IPO. The CEO and co-founder of the company, Aaron Levie (who I’ve met with several times), is a great promoter of the company and has built a strong brand. This has helped to create a large customer base, which includes more than 44,000 organizations. They range from small businesses to large enterprises like Ameriprise Financial, Inc. (NYSE:AMP), Gap Inc (NYSE:GPS), and Viacom, Inc. (NASDAQ:VIAB).

Investors in the Box IPO should also be encouraged by the technology platform. The company has made strong investments in security and mobile applications, which are key priorities for customers. Box has also been smart to allow third parties to develop applications on its platform, which has helped to create a thriving ecosystem.

The Box IPO also likely got a boost from the fact that the market opportunity is massive. “It has positioned itself as a major player in arguably one of the biggest software market niches: cloud collaboration,” said Ajay Patel, co-founder and CEO of HighQ. Consider that — according to Forrester Research — the number of information workers is expected to go from 615 million in 2013 to 865 million by 2016.

OK, then what are the risk factors for the Box IPO? Well, first of all, the company continues to post hefty losses — even after it has taken efforts to make some cutbacks. For the first nine months ended Oct. 31, the net losses amounted to $121.5 million. In fact, roughly about 97% of the revenues were spent on sales and marketing.

Yet growth is starting to decelerate. During the quarter ended Oct. 31, revenues increased by 69% compared to a 98% ramp for the quarter ended Jan. 31.

But the biggest problem for BOX stock is the intense competition. According to Vineet Jain, co-founder and CEO of Egnyte:

“With companies making cloud storage a free commodity, they will need to diversify beyond storage and create more unique value.”

But there are many other rivals that could put pressure on BOX stock. They include Microsoft Corporation (NASDAQ:MSFT), Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL), EMC Corporation (NYSE:EMC), International Business Machines Corp. (NYSE:IBM), Dropbox, Citrix Systems, Inc. (NASDAQ:CTXS) and Amazon.com, Inc. (NASDAQ:AMZN).

Keep in mind that there are several examples of cloud operators that have been crushed by the competition. One notable example is Millennial Media, Inc. (NYSE:MM). The company was unable to maintain its lead in the mobile app market against huge players like Apple Inc. (NASDAQ:AAPL) and Google.

The result: Since its IPO back in March 2012, Millennial Media has lost 94% of its value.

It’s true that Box is trying to adapt, such as by offering solutions that cater to various industries. While this may work, it will still take time. Let’s face it, the enterprise market has long sales cycles. Besides, it is always dicey when a company make a pivot — especially during its IPO.

Finally, BOX stock also benefited from spot-on timing. The week has seen a strong performance in the equities markets and there have also been solid IPOs from other enterprise operators, such as Hortonworks Inc (NASDAQ:HDP) and New Relic Inc (NYSE:NEWR). It also helps that the Box IPO had a small float, with the shares offered only 7.8% of the total outstanding shares.

So given the size, it really does not take much to move the price (this will change in six months when insiders will be allowed to unload their positions). But over the next couple quarters, there are risks that growth may continue to slow and the competition mount.

So for investors, it’s probably best to stay away from the Box IPO.

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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