Should You Invest In Box?




The California-based company Box Inc. will go public early this year, in January 23 (update: shares surged over 65%). Box is an online file sharing and personal cloud content management services for businesses, in other words, a storage platform company. For the company to grow faster they introduced a "freemium" business model in 2006 and after that they got a massive Increase of users (hundreds of thousands each quarter). CEO and Co-founder Aaron Levie and his team realized the cost of storage would reduce drastically so they lowered the barrier to product adoption to increase customers. Today you get up to 10 GB free storage via a private account. Box currently have over 32 million users and over 44,000 organizations who pay for their service, nearly 50% of Fortune 500 companies are paying customers. 


They consider that they are the best choice because they are both easy to use and has an enterprise focus.

Box is still continuing to grow rapidly after its ninth year, they grow twice as fast as the average SaaS (software as a service) company use to grow. The company has now updated its Form S1 and have started its roadshow, this is a standard procedure companies are doing to increase interest before their IPO (initial public offering). Box has postponed its IPO several times, first they would go public in March but chose to wait, the reason is said to be that investors interested in cloud computing stocks had started to cool off. "We're kind of waiting for the complete stabilization", said Aaron Levie.


In the latest round of investments, in July, the investors valued Box to $2.4 billion dollars. However, there were high demands on the company if they would not carry out its IPO before July 7 this year, the value of the investors shares would increase. Now they offer 12.5 million shares between $11 to $13 which would give them a valuation at a maximum of $1.5 billion (the valuation has fallen by more than a third). Why the company's valuation differences so much are hard to know, but large valuation changes is common in SaaS companies. It could have to do with their financials, as they show that Box's burn rate is very high (burn rate is the same as negative cash flow). 


They spend enormous money on sales and marketing, something that is common for tech startups that will go public.

They spend enormous money on sales and marketing, something that is common for tech startups that will go public. However, many in the tech industry believes that Box's numbers is on solid ground and that their burn rate will generate long-term contracts that will make them a lot of money, their income is increasing like crazy. Below are some slides from their roadshow showing the strongest reasons why you should invest in Box.  


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They consider that they are the best choice because they are both easy to use and has an enterprise focus. Their sales and marketing expenses relative to their income has declined over the past three years. Further, they knew since the founding of the company that the cost of storage drastically would reduce. Box's aggressive way to acquire customers pays off because they can sell upgrades ahead and eventually get loyal customers. Then they can reduce sales and marketing, which will lead to high margins. Box uses Bechtel (one of the world's largest construction companies) as an example. The company started in 2011 with only 300 seats, the year after they increased with 5,000 seats and the next year they bought 9,700 more. After three years, Bechtel had increased from 300 users to 15,000 users and Box did not have to spend any money on generating that increase. I think this is Box's great strength and it demonstrates the tremendous growth potential the company has. In the long term Box counts of sales and marketing cost to be around 35-40%, it would mean a 15-20% operating margin and 20-25% FCF (free cash flow) margin. If they would achieve their long-term goals I think the financials look great. 

But who knows maybe this is just the beginning of Box's success?

If Box is a good investment or not is something controversial. Because the company burns so much money many doubts the long-term viability of its business model, others claim that Aaron Levie is a genius. Box is a growth sensational but requires massive amounts of capital to operate. I personally will not dare to risk a large investment in Box, I want some safe sustainability of long-term growth in my tech investments. However, I will consider investing 3-5% in the company to spice up my portfolio a bit. It's important that you yourself decide whether or not to invest in Box, and not only listen to others. But who knows maybe this is just the beginning of Box's success? The entire roadshow by CEO Aaron Levie, CFO Dylan Smith and COO Dan Levin, can you see here: www.retailroadshow.com and below you can see an interview with Aaron Levie and Cisco Systems CEO John Chambers at Re / code. Levie explains why Box's burn rate is crazy high. "I would be the first to say we’ve been aggressive, but there is simply not another logical way to attack the market. If you assume this market is going to be worth tens of billions, if it’s that big there can only be two, maybe three leaders. So we’re incentivized to grow as fast as possible." 


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