Sorry, the Box IPO is doomed

When this money-losing stock goes public, steer clear. The offering won't even cover the red ink at the cloud-computing startup.

By InvestorPlace Mar 25, 2014 12:49PM

Image: Businessman reading newspaper © A. Chederros/ONOKY/Getty ImagesBy Jeff Reeves

Box, an online file-sharing service that stores data on the cloud, just filed paperwork to go public.

And the Box IPO news comes amid a frenzy of other big-name companies pushing to go public, including "Candy Crush" video game studio King Digital Entertainment and online food delivery service GrubHub.

The Box IPO also filing comes during a conspicuous race against cloud storage company Dropbox to get to Wall Street with a public offering first.

But amid the frenzy to file for IPOs lately, investors need to keep a cool head. Because many of these initial public offerings will end badly.

And I remain convinced the Box IPO will be one of them.

Why? Here's the payoff paragraph from the company’s S-1 filing with the SEC:

We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future.

We have incurred significant losses in each period since our inception in 2005. We incurred net losses of $50.3 million in our fiscal year ended December 31, 2011, $112.6 million in our fiscal year ended January 31, 2013, and $168.6 million in our fiscal year ended January 31, 2014. As of January 31, 2014, we had an accumulated deficit of $361.2 million.

For context, Quartz reports that "the cloud storage company is expected to raise $250 million in its initial public offering." So this ballyhooed Box IPO won't even cover the existing red ink the tech startup has amassed.

So why is there such hype around a Box IPO?

Because of that stupid buzzword, the "cloud."

You see, just like the dot-com bubble fueled speculation around anything Internet-related, the idea of a cloud computing revolution is just as visceral to some tech investors.

After all, the social-media wave is old news. LinkedIn (LNKD) went public in 2011, Facebook (FB) went public in 2012 and Twitter (TWTR) offered in 2013; cloud computing is all the rage these days.

The problem, however, is that many cloud-computing stocks are deeply unprofitable and face entrenched competitors who may be late to the game but are bringing the big guns around slowly.

Box lists Dropbox as a competitor, a similar startup that is hoping to go public soon as well. But it also faces tough competition from cloud-computing arms at Google (GOOG), Microsoft (MSFT) and Citrix Systems (CTXS) among others in the fast-growing space. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

Consider that Google Drive just announced it would cut cloud storage pricing significantly to make it more attractive to users. GOOG now offers 100 gigabytes of storage for just $1.99 monthly -- down from $4.99. Google also will offer 1 terabyte of storage for just $9.99 -- down dramatically from $49.99 previously.

By way of contrast, Box charged $5 for 100 gigs and $15 for 1 terabyte currently.

Now, Box does has an enterprise flavor that may make it attractive with IT managers. And of course, there are plenty of ways to evolve the business and grow over time.

But this Box IPO is not something the typical investor should be interested in at all.

The icing on the cake? The Box IPO will involve two classes of stock, where common shareholders get just one vote per share and insiders with a special class of stock get 10 votes per share. These kind of dual-class offerings allow tech startups to raise cash without giving up control.

But given how the business is run so far, that should give investors even more pause.

Whenever Box stock starts to trade . . . steer clear.

More From InvestorPlace

Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities.

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