Box IPO Valuation – To Buy or Not to Buy?

On 24th March,2014, Online storage company Box filed for an IPO and unveiled its plans to raise US$250 million. The company is in race to be build the largest cloud storage platform and it competes with the biggies like Google Inc and its rival, Dropbox.  

Scanning through the Box S-1 Filing, you may note that Box is a typical Silicon Valley IPO Company, with rapid revenue growth and mountain of losses. If you have already decided  to invest in Box Inc, then please do NOT read my article on Top 10 Scariest Details of the (Black) Box IPO. You may also want to download  Box Financial Model for further details.

Box IPO Valuation?

As seen from above, Box massive losses and no profitability in the near future leave us with less options for valuing this firm using the traditional methods such as Price to EPS (PE), PEG, EV/EBITDA etc literally fail. So how do we find the value of Box?

If you wish to learn more about valuation, you can read this article on Equity Value vs Enterprise Value, For Box IPO valuation, I have used the following approaches  –

1. Relative Valuation – SAAS Comparable Comps
2. Comparable Acquisition Analysis
3. Valuation using Stock Based Rewards 
4. Valuation cues from Box Private Equity Funding 
5. Valuation cues from DropBox Private Equity Funding Valuation
6. Box DCF Valuations

The graph below summarizes Box IPO Valuation under different scenario.

Summary of the Analysis

• Cannot apply DCF valuation (#6) as the FCFF is negative even for the projected FY19.
• Comparing Box valuation (#5) with Dropbox recent funding implies the highest range of share price ($60/share-$65/share)
• Comparable Acquisition comps (#3) provides the lowest range of share price valuations($5.2/share – $12/share)
• Overall, if we allocate 20% weightage to each of the above valuation methodology, then the Box IPO expected price comes out to be $27/share

Let us now closely look at the detailed analysis of the Box IPO valuation methodologies used –

#1 – Relative Valuation – SaaS Comparable Comps

While evaluating Box Inc Income Statement, you may note that Box Inc has historically shown high growth trajectory (>100%), Gross Margin of 70%-80%, Renewal rates of more than 100% and obviously it has an opportunity upsell and cross sell in a market that is growing day by day. However, Box Inc does not become profitable in the near future (even at an EBITDA level, see the chart below)

In such a scenario, we can apply either (a) Enterprise value per $ sales (EV/Sales) or (b) Assign a value per subscriber (EV/Subscriber) or Both (a) and (b)

Why assigning EV/Subscriber is not Right?

I know you may be wondering how we can assign value for business on the basis of subscriber? Even i was left wondering whether it is logical to apply a per subscriber value for Box Inc like the way it was applied in the case of Twitter, Facebook. Infact, Box Inc S-1 prominently displays the number of subscribers (as seen in the below chart).

I started asking myself these questions and it became increasing clear to me that valuing Box on per subscriber basis is not feasible –

• What investors should make of the company’s 25 million total registered users, 93% of which aren’t paying customers? – Means only 7% are paying customers!
• What is the conversion ratio – converting from Free Trial users to actual paid users? The company prospectus doesn’t provide any data with respect to the conversion of the free users to paid users
• What has been the subscriber growth rate for Box inc? Are those 25 million registered accounts really indicative of Box’s ability to grow in coming years? The company doesn’t provide any data on this.
• Is Box a Social Media Networking Site? Obviously No.

The last question was relatively important because in the case of Facebook and Twitter, social media metrics like Monthly Active users (MAU) have been used a proxy for company’s growth and has been an acceptable means of valuation. Increase or decrease of MAUs are key pointers for predicting earnings and valuations.However, Box subscriber activity or registered users do not provide any direct correlation of increase/decrease interactions and its associated value of the firm.

Applying EV/Sales for Box Valuation

This leaves us with only one valuation tool can be applied for Box IPO valuations i.e. EV/Sales. For doing a quick comparison across SaaS companies, i took the SaaS companies data from the BVP Cloud Index.

SaaS Comparable Valuation – Important Notes

• Cloud companies are trading at an average of 9.5x EV/Sales Multiple.
• We note companies like Xero is an outlier that trades at 44x EV/Sales multiple (expected 2014 growth rate of 94%).
• Cloud companies trade at EV/EBITDA multiple of 32x.

Box Valuation

• Box Inc valuation range from $11.02 (pessimistic case) to $24.74 (optimistic case)
• Most expected valuation for Box Inc using Relative Valuation is $16.77 (expected)

#2 – Comparable Acquisition Analysis

“Comparable Acquisition Analysis” is based on the premise that the value of a company or an asset can be estimated by analyzing the prices paid by purchasers of ownership interests in reported comparable acquisitions. There has been a number of transaction within the SaaS domain in the recent past. Below are some of the large M&A transactions in the recent past.

Based on the above comparable acquisition analysis, we can arrive at the following conclusions for Box Valuation –

• Mean EV/Sales of 7.4x implies a valuation of closer to $900 million (implying a share price of $9/share)
• Highest EV/Sales of 9.7x implies a valuation of $1.2 billion (implying a share price of $12/share)
• Lowest EV/Sales of 4.1x implies a valuation of $520 million (implying a share price of $5.2/share)

#3 – Valuation Using Stock Based Rewards

The following table summarizes, by grant date, all stock options, restricted stock units and restricted stock awards from January 1, 2013 through January 31, 2014:

As per Box Inc S-1 filing, they have use 3 approaches primarily for valuing stock based rewards –

• Income Approach (just like DCF approach) – Estimating the future cash flows of the company and then discounting the future cash flows.
• Comparable Company Analysis with valuations based on Revenue (trailing 12 months and forward 12 months) and EBITDA Multiples (trailing 12 months and forward 12 months).
• Mergers and Acquisition Transaction analysis

Box Inc arrived at these deemed fair prices by applying reasonable weights to Income Approach, weights to comparable company analysis and Merger and Acquisition Transaction Analysis. Thereafter a reasonable marketability discount of around 20% was applied. 

I plotted these deemed fair prices of the Box Inc to see how it has changed over a period of time.

As we can see from above Valuation of Box Inc Shares increased dramatically from $4.53 in Feb, 2013 to $14.06 in Jan,2014 (an incredible jump of more than 200%!).

Does this imply that valuation of Box Inc would continue the same momentum for the next one year? Just on the basis of trend can a valuation number be arrived at?

• Optimistic Case – 100% appreciation – if a similar momentum continues, then the share prices may touch $30 per share at the end of Jan’2015.
• Expected Case – 50% appreciation – A jump of 50% from the current levels may lead to Box IPO price at $21 levels.
• Pessimistic Case – 0% appreciation – In the pessimistic case, Box share may remain at the same level as the most recent deemed fair price of $14.1 in the near term.

#4 – Valuation cues from Private Equity Funding

Though it is good to understand the valuation range using the Stock Based Rewards, however, a better measure to understand Box Inc valuations would be to look at its Private Equity Funding structure and its implied share price. Below is the graph that details implied share price at various funding levels.

Note how Box Inc implied share price has increased from $1.28 to $18.00 since April, 2010 reflecting a jump of whooping 1300%! (CAGR of 251%).

• Optimistic Case – 100% appreciation – if a similar momentum continues, then the share prices may touch $36 per share at the end of Jan’2015.
• Expected Case – 50% appreciation – the stock may trade at around $27.
• Pessimistic Case – 0% appreciation – In the pessimistic case, Box share may remain at the same level as the most recent deemed fair price of $18 in the near term.

#5 – Valuation cues from Dropbox Private Equity Funding

In January, 2014, WSJ reported that Dropbox raised $250 million funding from Blackrock and existing investors and pegged the company valuation at $10 billion. This is in addition to its October 2011 round of funding where Dropbox raised $257 million at a valuation of $4 billion (more than double in approximately 2 years).

DropBox reported its sales of around $200 million implying a EV/Sales multiple of around 50x.

• Box Sales for FY14 was $127 million. If we apply the same multiple for Box, then the valuation would touch $6-6.5 billion.
• Assuming that post IPO, Box number of shares would be around 100 million, then the per share value would be between $60-$65 per share 

#6 – Discounted Cash Flow Approach for Box

Discounted Cash Flow (DCF) approach requires forecasting and modeling future financials. Though preparing a financial model was a relatively easier task, the area where I faced problem was in assumptions ( Sales growth, Costs, Margins, Capex etc), all leading to the Free Cash flow to the firm.

Forecasting Box Free Cash Flow (FCFF)

Forecasting of FCFF of Box Inc involved preparing an integrated Box financial model. But here are some of the important assumptions used in the model.

Using the above assumptions, we find that the company does not generate any free cash flows in the next five years! 

Following observations regarding the DCF Model for FCFF

• Box FCFF is negative for the next five years. I feel it is not correct to forecast beyond this period as it introduces further volatility
• Even if we forecast for another 5-10 years, the contribution of Terminal Value to Total Enterprise value would be atleast 90-95%. This leaves too much room for errors as valuation of Box may change substantially with a very small change in assumed WACC and growth rate.

 Next Steps?

Anything I missed? Let me know what you think, your feedback by Leaving a Comment

p.s. – I do not represent any brokerage firm. The above views are my own assessment of Box IPO. I have tried my best to ensure factual accuracy of the analysis, however, please feel free to provide me with corrective measures if you spot any errors.