Cloudy With a Chance of Profits?

 | Mar 25, 2014 | 11:30 AM EDT  | Comments
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It seems like you hear about a new cloud offering everyday. Cisco (CSCO) announced on Monday it would build an enterprise cloud offering. Then, after the close, Silicon Valley darling Box.com filed for an initial public offering.  

CRN magazine in January named its top 100 cloud vendors. Yes, they found 100 cloud vendors! With so much competition, will any of these companies make money? Is the cloud computing market profitable or is it just cloudy with a chance of profits?

Investors tend to lump all the cloud computing companies together, but there are differences between them. The market breaks down into five major categories: infrastructure, development, storage, software and security. Companies that provide infrastructure, like Amazon's AWS, can supply everything you need on demand from computing power to storage.

Enterprise customers hire development vendors to build custom cloud solutions.

Storage cloud vendors, like EMC Corp. (EMC), provide massive amounts of on demand storage. Cloud storage vendors are hot right now, since many companies are stashing their data away in the cloud so they can make it available in real time for analysis.

Software and Security vendors supply software and equipment to make your data safe and secure.

I believe that Box.com operates at the low end of the cloud storage business. Box offers content collaboration and file storage to enterprise customers. In contrast, Dropbox offers its file sharing service to individual consumers and small businesses. 

Box has 25 million registered customers, of which only 34,000 pay for the service. The largest customer has 60,000 users.

Since its founding in 2005, revenue has grown dramatically. In fiscal 2011, the company had $21.1 million in revenue. By the end of fiscal 2014, Box reported revenue of $124.2 million. Despite the strong revenue growth, the company had a net loss of $168 million. Box won't have to worry about taxes anytime soon. The company has racked up $262 million worth of net operating loss carry forwards.

In order to drive such strong revenue growth, Box revved up the sales and marketing machine. In fiscal 2014, sales and marketing jumped 72.5% to $171.1 million. The marketing push paid off and revenue increased 111%. Most of the increased marketing expense went to hire an additional 139 salespeople. The company ended fiscal 2014 with 972 employees.

Aaron Levie, age 29 and Dylan Smith, 28, co-founded Box and serve as the Chief Executive Officer and the Chief Financial Officer, respectively. While I don't mind having a 29-year old CEO, I'm pretty uncomfortable with a 28-year old chief financial officer. I don't think I'm alone. I think most institutional investors will pass on the offering if Mr. Smith remains the CFO.

Venture capitalists have poured a ton of money into Box. In just the last two rounds of funding, VCs forked over $150 million and another $99.7 million. The company ended the year with $108 million in cash. With this IPO, Box is looking to raise an additional $250 million. I just don't see a clear path to profitability.

I would pass on the Box IPO.

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