Despite Steady Financials, Box Drops 37% in Value — Here’s Why

Why Box IPO Drops in Value

Lower Valuation Yet Steady Financials

Box filed their most recent S-1 late last week, setting out to raise $186.9 million at a valuation of approximately $1.5 billion, which, as you’ve probably already heard, is significantly less than the $2.4 billion valuation they received in their July fundraising. That being said, their financials appear to have slight improvements from those of last year’s S-1. Sales and marketing spend is finally lower than total revenue, net losses are growing at a less rapid rate, and net retention is still sky high.

box s&m spend against revenue

box net loss against revenue

box3.1Note: annualized financials for 2014 are projected out from 9 months given to October 31, 2014

So Why the Drop in Value?

Despite these improvements, Box’s valuation fell a staggering 37% in the nine months since their March 2014 filing. The plunge was surely in part due to the limited growth potential of monetizing from storage. There are numerous sync and share platforms out there, but no viable options are offered for free. But how does that figure look in five or 10 years, as storage capabilities continue to advance and Amazon and Google happily break even in order to win the lion’s share of the market? The other challenge for Box is that the core competencies of most the storage providers in this competitive market look uncomfortably similar.

In other words, the very foundation of Box’s offering — cloud storage and file sharing — is quickly becoming a commodity. Though Box boasts a user-friendly interface and a secured file-sharing experience, the core capabilities of file sharing are not largely differentiated across all the different providers.

Looking at Box’s milestones can be prescriptive for any company attempting to build itself around technologies that advance as rapidly as something like cloud storage (e.g. archiving or messaging). The cautionary tale here is that it is very difficult for companies built off technologies that will inevitably become commoditized to sustain profits in the long run.

Box Needs to Differentiate their Product

So, does Box truly have a future as a standalone, public company, or is Aaron Levie priming the company to get acquired? Who knows, maybe Box is already in talks with Google, Microsoft, Amazon or some other strategic prospect. Prior to Box’s most recent S-1 filing, Dan Lyons predicted that the company would be acquired in 2015. That option isn’t out of the picture even post IPO.

If Box carries out their plans to IPO and hopes to become the market leader in enterprise cloud storage (likely their plan and goal), they will need to invest into building a product differentiator. Here’s a snapshot of Box’s recent expenditures as they compare to revenue:

box4

Box, like most SaaS companies, invests significantly in product distribution (sales and marketing), while research and development spend takes a back seat. That’s not uncommon or surprising — it’s important to grow revenues and display promising financials when your numbers are showcased to the entire world.

It’s equally important, however, to ensure the longevity of your company by investing in (sometimes radical) product improvements, especially when you’re selling a soon-to-be commoditized product and “practically all” your revenue is coming from subscriptions rather than support.

But It’s Not that Easy…

We’re left with several open-ended questions. When will cloud storage become commoditized? What will be the next real innovation in the store and share industry? What can Box tell us about Dropbox’s future (they might go public within the next two years, but where will they be in 5 or 10 years)? All things considered, I’m a big fan of Aaron Levie and I’m curious what plans he has in store for Box.

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