Cloud computing, cloud storage, software as a service, kind of buzzy buzzwords. Most are merely new-found ways to make older less sexy computing functions sound cooler, describing new ways of doing old things. While first mover advantage can be huge for small companies looking to capitalize on secular shifts within technology, hyper growth is bound to attract large established players who can compete on price. This is exactly what has happened in cloud storage, which is essentially the business of managing businesses data storage off site at server farms as opposed to maintaining servers on a business’s premises. BOX and DropBox are two such companies who were early to the space, only to see tech behemoths like Amazon, Apple, Google and Microsoft aggressively enter the market.
BOX went public in January, offering 14.4 million shares at $14. After initially soaring close to 75% on the day of the IPO, the stock has come back to earth and has spent the last few months in the high teens:
With a float of only 18 million shares, 25% of which is sold short, I think it is safe to say this stock is hardly a bastion of liquidity. But the fact that one holder, TPG, controls 32.7% of the shares outstanding should cause shorts to take pause. On July 22nd this should all change, as some selling restrictions will be lifted following the lock-up expiration, from BOX Amended S-1, pag 39, on jan 22nd, 2015:
The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock in the market after this offering, and the perception that these sales could occur may also depress the market price of our Class A common stock. Based on shares of our capital stock outstanding as of October 31, 2014, we will have 119,473,689 shares of our capital stock outstanding after this offering. Our executive officers, directors and the holders of substantially all of our capital stock and securities convertible into or exchangeable for our capital stock have entered into market standoff agreements with us and/or lock-up agreements with the underwriters under which they have agreed, subject to specific exceptions, not to sell any of our capital stock for 180 days following the date of this prospectus.
I suspect great efforts will be taken to manage the new shares, but these have been tricky to navigate for long holders and shorts alike.
BOX reports fiscal Q1 results tonight after the close. The options market is implying about a 10% one day move. With the stock at $17.65 the June 19th 17.50 straddle (the call and put premium) is offered at about $2, if you bought that you would need a move above $19.50 or below $15.50 to make money by next Friday’s close, or about 11.5%.
Despite the illiquidity in the stock, options are surprisingly liquid, as the bid ask on the options detailed above is between 5 and 10 cents on each leg. There is a total of 32,500 of open interest, with the three largest strikes the June 17.50 calls with 1900, Sept 20 calls with 1800 and 1700 of the June 20 calls. For comparison sake, Shake Shack (SHAK) with only a 5.5 million share float and 12 million outstanding and a $2.7 billion market cap, vs BOX’s $2.1 billion does not even have options listed.
I have no idea what BOX’s results will be tonight, I suspect they will disappoint and with the stock more than 25% above the IPO price it could find sellers. I would also suspect that the lock up will quickly become a focus of investors. On the flip-side, with 25% short interest, 32.7% of the shares outstanding in one holders hands, a beat and raise could cause a heck of short squeeze.
The earnings event got me looking at the stock, but the impending liquidity coming on line may be the main event in the coming weeks.