Box Eyes IPO At Unrealistic Valuation

Within the cloud computing segment, enterprise content management (ECM) is a fast-growth industry. Gartner projects that the ECM market will grow at a compounded rate of 10.1% annually to more than $5.7 billion by 2014.  Another report by researcher The Radicati Group projects that by 2016, the market will be worth $7.5 billion. Big names in the market include IBM, Microsoft, and Oracle. But smaller players, such as California-based Box, are also making it big.

Box’s Financials
Box was founded in 2005 by friends Aaron Levie and Dylan Smith as a dorm room project while they were studying at the University of Southern California. Box provides cloud content management solutions to more than four million individual and business users. The company offers a flexible content management and collaboration solution that lets users access and share content online, and it also enables IT professionals to view how content moves within and outside of their organizations.

Their client base includes more than 10 million individuals, 120,000 SMBs, and Fortune 500 companies. Eighty-two percent of the Fortune 500 businesses are their customers. An individual, single subscriber membership is available free to let users store up to 5 GB of documents online. Additional space is available for a charge which ranges from a monthly charge of $9.99 for 25 GB of space and $19.99 for 50 GB of space. The personal access comes with features such as file sharing links, ability to transfer content securely, and the ability to edit content online.

Smaller businesses can purchase a subscription from Box at a price of $15 per user per month. Businesses can store up to 1,000 GB of data and such accounts come with additional features that enable collaboration between users. Organizations with more than 500 users are charged an enterprise price. These users have access to unlimited cloud capacity and several enhancements, including integration with Salesforce.com, group-based access to files, version control edit systems, and dedicated support.

To date, Box has received $284 million in funding from investors, including Draper Fisher Jurvetson, US Venture Partners, Scale Venture Partners, Meritech Capital Partners, Emergence Capital Partners, Andreessen Horowitz, Salesforce, New Enterprise Associates, and General Atlantic. In its latest round of funding held in July 2012, the company raised $125 million from General Atlantic at a valuation of $1.2 billion. That is a significant increase in valuation in the context of market reports that earlier this year claimed Citrix Systems was looking to buy Box for as much as $700 million. Box had turned down the offer and is now expected to launch its IPO by next year at a valuation of $2 billion-$3 billion.

Strong Funding Not Yet Translating Into Profits
While valuations remain high, their current financial performance still leaves a lot to be desired. Analysts estimate that Box earned $25-$40 million in revenues last year while recording losses of nearly $18 million in the period. Another report pegs their revenues at $60 million for this year. Apart from infrastructure development, the company is spending heavily on marketing. Last year, it announced a giveaway of 20 GB of online space to iPhone and iPad users. Within five days of the sales pitch, more than 5 million downloads had taken place for the offer. 

Assessing the Threat of Google Drive
Competition within the industry is also increasing. Recently, Google announced its entry into the market with the launch of Google Drive. Similar to Box, Google Drive lets users use cloud for document storage, collaborate on documents, and search for content. Storage space is also much cheaper than at Box. While 5 GB of storage is available free, users can updgrade to 25 GB for $2.49 per month, 100 GB for $4.99 month and 1 TB for $49.99 per month.

Box, however, claims that Google Drive will not impact its performance because Box is more focused on the enterprise customer, while Google Drive will be more in demand by individual users. This is not an accurate analysis, since Google Docs, the predecessor to Google Drive is a popular product among SMEs, and has even seen traction in enterprises for the easy collaboration capabilities. It seems like Google Drive will threaten Box with a price undercutting, putting the $284 million venture investment in jeopardy. Relative to the investment level, it seems the revenue level is still quite low.

There is no question that market is hot. It is, however, also, an extremely competitive space. M&A is happening already. Citrix, having failed to acquire Box, has moved forward with other acquisitions like ShareFile and Podio, and has positioned to become a major player. They already have  a sizable SME customer base, as well as enterprise channel.

Against this backdrop, the valuation seems rather aggressive to me.