Too Early for Profits, But Not Forever

Despite the fact that profitability may be a long way off for this cloud storage company, MoneyShow's Jim Jubak thinks it is too early to simply dismiss the company as just another sign of another Internet bubble.

The timing could be better.

News that Box, a cloud storage company, is looking to raise $250 million in an April initial public offering, broke the same day (yesterday, March 25) that Google (GOOG) announced that it was reducing the price for its cloud services by 30% to 85%.

Hard to see how Box, which was valued at $2 billion in its last round of venture capital, could possibly be worth the $3 billion to $5 billion post-IPO figure that's being thrown around Wall Street. Especially because Box's filing with the Securities & Exchange Commission, released yesterday, makes it clear that this company is a long, long way from seeing any profits. Sales climbed to $124 million in the fiscal year that ended in January 2013, from $59 million in fiscal year that ended in January 2012. But net losses in the same period climbed to $168 million from $112 million.

In its prospectus, Box says it does not expect to be profitable "for the foreseeable future."

Sure plays into the current cynicism about profitless tech companies and market bubbles, right?

I'm not willing, however, to dismiss Box (which will trade under the ticker BOX after it goes public) as just another sign of another Internet bubble in the current market. The problem with valuing the company is that the cloud market is real and growing fast, but that it hasn't yet shaken down into clear segments with winners and losers (and clear criteria for what distinguishes a winner from a loser).

Consider this post more an attempt to sketch in what those criteria might be, than a rave or pan on Box and its IPO.

The public cloud market—the one you probably use yourself to storage photos or share documents—is forecast to grow to $31.4 billion in 2017, from $6.2 billion in 2012. That's a compounded annual growth rate of 38.3%.

This is the part of the cloud market where Google competes—and where Google cuts prices. The public cloud sector is dominated by Amazon.com (AMZN) with Microsoft (MSFT), Google, IBM (IBM), and Rackspace Hosting (RAX) competing for the Number Two slot.

But the public cloud, as you know it, isn't where the action is.

The big growth in the coming decade will come as cloud companies penetrate the business market. Selling into that market is a very different proposition from running ads on the Internet to reach consumers. And the question of who can come up with the killer competitive advantage in the business market is still very much an open question. That's why the Box IPO marks only the beginning of a wave of cloud IPOs. Next name up that you may have heard of is likely to be Dropbox.

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