Box IPO

Box IPO Valuation Complete Guide

On March 24, 2014, Online storage company Box filed for an IPO and unveiled its plans to raise US$250 million. The company is in the race to 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 a mountain of losses. If you have already decided to invest in Box Inc, 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’s massive losses and no profitability shortly leave us with fewer options for valuing this firm using the traditional methods such as Price to EPSPrice To EPSThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more (PE), PEGPEGThe PEG ratio compares the P/E ratio of a company to its expected rate of growth. A PEG ratio of 1.0 or lower, on average, indicates that a stock is undervalued. A PEG ratio greater than 1.0 indicates that a stock is overvalued.read more, EV/EBITDA, etc. 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 a different scenario.

Summary of the Analysis

• Cannot apply DCF valuation (#6) as the FCFFFCFFFCFF (Free cash flow to firm), or unleveled cash flow, is the cash remaining after depreciation, taxes, and other investment costs are paid from the revenue. It represents the amount of cash flow available to all the funding holders – debt holders, stockholders, preferred stockholders or bondholders.read more 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 methodologies, 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 a high growth trajectory (>100%), Gross Margin of 70%-80%, Renewal rates of more than 100%, and it has an opportunity upsell and cross-sell in a market that is growing day by day. However, Box Inc does not become profitable soon (even at an EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business's performance with that of its competitors.read more 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 a value for business based on the subscriber? Even I was left wondering whether it is logical to apply a per subscriber value for Box Inc, like how it was involved in the case of Twitter, Facebook. 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 increasingly clear to me that valuing Box on a 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? – This means only 7% are paying customers!
• What is the conversion ratio – converting from Free Trial users to paid users? The company prospectus doesn’t provide any data concerning the conversion of free users to paid users.
• What has been the subscriber growth rate for Box inc? Are those 25 million registered accounts indicative of Box’s ability to grow in the 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 crucial because, on Facebook and Twitter, social media metrics like Monthly Active Users (MAU) have been used as a proxy for its growth and have been an acceptable means of valuation. An increase or decrease of MAUs is key pointers for predicting earnings and valuations. However, Box subscriber activity or registered users do not directly correlate with increase/decrease interactions and its associated value of the firm.

Applying EV/Sales for Box Valuation

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

Also, check out how Comparable company analysis is done in the IB industry.

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 multipleEV/EBITDA MultipleEV to EBITDA is the ratio between enterprise value and earnings before interest, taxes, depreciation, and amortization that helps the investor in the valuation of the company at a very subtle level by allowing the investor to compare a specific company to the peer company in the industry as a whole, or other comparative industries.read more of 32x.

Box Valuation

• Box Inc valuation range from $11.02 (pessimistic case) to $24.74 (optimistic case)
• The 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 a 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 $1.8 billion (implying a share price of $18.4/share)
• The highest EV/Sales of 9.7x implies a valuation of $2.4 billion (meaning a share price of $24.7/share)
• The lowest EV/Sales of 4.1x implies a valuation of $1.1 billion (meaning a share price of $9.3/share)

#3 – Box IPO Valuation Using Stock-Based Rewards

The following table summarizes, by grant date, all stock options, restricted stock unitsRestricted Stock UnitsRestricted Stock Units or RSU can be defined as stock-based compensation that is issued as company’s stock to an employee. The company establishes vesting requirements based on the performance of an individual and the length of the employment.read more, and restricted stock awards from January 1, 2013, through January 31, 2014:

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

• Income Approach (just like the 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 deliver 12 months).
• Mergers and Acquisition Transaction analysis

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

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

As we can see from the above, the 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 the valuation of Box Inc would continue the same momentum for the next year? Just based on 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 suspicious 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, a better measure to understand Box Inc valuations would be to look at its Private Equity Funding structure and its actual share price. Below is the graph that details the 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 whopping 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 suspicious 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 two years).

Dropbox Valuation
Dropbox Sales	200 Million
Funding	257 Million
Estimated Valuation	10,000 Million
EV/Sales	50X

DropBox reported its sales of around $200 million, implying an EV/Sales multiple of approximately 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 IPO Valuation

The Discounted Cash FlowDiscounted Cash FlowDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company's future performance.read more (DCF) approach requires forecasting and modeling future financials. Though preparing a financial model was a relatively more straightforward 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 essential 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 harmful 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 ValueTerminal ValueTerminal Value is the value of a project at a stage beyond which it's present value cannot be calculated. This value is the permanent value from there onwards. read more to Total Enterprise valueEnterprise ValueEnterprise Value is a measure of a company's total value that spans the entire market rather than just the equity value. It includes all debt and equity-based ownership claims. This value, which is calculated as the market value of debt + market value of equity - cash and cash equivalents, is particularly relevant when valuing a takeover.read more would be at least 90-95%. This leaves too much room for errors as a valuation of Box may change substantially with a tiny change in assumed WACC and growth rate.

If you are new to Company Analysis, you can look at this Ratio Analysis ExcelRatio Analysis ExcelRatio analysis is the quantitative interpretation of the company's financial performance. It provides valuable information about the organization's profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements.read more Case Study to learn more about Fundamental Analysis.

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 assessment of the Box IPO. I have tried my best to ensure the factual accuracy of the analysis; however, please feel free to provide me with corrective measures if you spot any errors.

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