2014 showed readers of options advisory newsletters that the initial public offering (IPO) market generally gives investors two types of company. The first is the kind that many have been discussing for years as a potential candidate for an IPO, as Wall Street investors and the general public seek a chance to be an owner of part of that company. The enormous and record-breaking float of Alibaba (BABA) was an example of this.
On the other hand, there is the kind of IPO that quietly comes onto the market without much fanfare or notice.
The IPO of Box Inc. is a curious mix of both of these. Box has been a company that for years has been a favorite of its users and the investment community. Options trading services saw the profitable potential of the company as well as the potential global reach of the product. Many thought an IPO was a great way to generate the capital and the publicity needed to help the company to its next stage of global growth.
However, as the years went by, Box did not move any closer to an IPO.
All of that changed early in 2015 when Box finally announced that they were ready to begin the IPO process. After an amazing debut on Friday, January 23, 2015, where the share price rose by 70% on the first day of trading, is there a profitable future for Box?
Understanding the Business
The service that Box provides is as simple as its name. Essentially, the company is a provider of digital storage solutions. More specifically, it allows customers to store their documents, files, movies and music securely in the cloud, and access it from any device.
The strength of the business model is that it is not tied in to any particular ecosystem. What we mean by this is that files stored with Box can be accessed from a Microsoft PC, an Apple handheld device, a HTC Smartphone or an Android operating system as well as many more. This means that Box is a universal service at a time when companies like Google and Apple are trying to ensure customers stay within the boundaries of their own devices and software.
The company generates revenue by a “ladder” business model. The first step on the ladder is to get customers to sign up. They then are provided with a level of free data as well as tutorials about how to share, store and edit files.
Customers can then “unlock” more data and storage if they invite friends to the service or they can purchase additional data. For certain customers who store large amounts of music or graphic files, this is a useful feature as their free allocation can run out very quickly.
More recently, Box has begun targeting enterprise solutions for data storage. This includes securing, protecting and managing the large streams of data that is generated by businesses, governments and multinationals.
Metrics and Measures
The company has priced its shares at between $11 and $13 for the IPO. However, the investor interest in the company was strong, and share debuted at $14, and then went on to rise by an impressive 70% on the first day of trading.
Box raised $150 million during the most recent summer, which gave the firm as a whole a valuation of $2.4 billion. Interestingly for options advisory newsletters, the share value that Box has placed on each share of between $11 and $13 indicated a valuation of around $1.5 billion, which may suggest the valuation is falling.
In a vote of confidence, the co-founders of the company will hold on to stock after the IPO of just under 5% of the company. Well-known venture capital firms will own around 20%.
Box serves a range of top tier clients including Eli Lilly, Gap Inc and GE. Revenues rose 80% in the last year to October 31 as a result of these client wins, with $153.8 million in revenue for 9 months. The loss generated by the company over the same period was $121.3 million, which was steady from the year earlier.
The Investment Case
The investment case for Box is interesting, as it can be viewed as both a leading firm and a challenged one. On the one hand, it began life as a customer facing company that provided a cloud storage solution to any user for free. They built up a loyal base as a result, and the fact the system was accessible on all platforms greatly reduced the barriers to use and increased adoption rates.
However, in the five years or so the company has existed, Apple, Google and other smaller rivals have jumped on the storage business model. They too now provide cheap, efficient storage in the cloud to their users.
As a result, Box is now focused much more heavily on enterprise users rather than smaller or single users to generate revenues. Going hand in hand with that focus is a renewed goal towards providing better data management options as well as security for their clients’ information.
This suggests that Box could use some of the money they raise in their IPO to transition from being a cloud storage company to a true digital data services provider, either by hiring the talent required to do so, or by acquiring another business.
Box is an interesting candidate for options trading services to consider because the IPO has generated substantial interest and a strong set of early numbers. In addition, it has changed its business model over its short life, and may soon show financial benefits as a result of these changes. However, there is a real chance for options traders to profit from the Box IPO, and being subscribed to a high quality options trading newsletter can help unlock the strategies to do this successfully.