Investors Bet Box Inc. Can Grow Beyond Storage Business--Update

By Douglas MacMillan, Corrie Driebusch and Telis Demos

Investors in Box Inc.'s initial public offering Thursday are betting the software maker can grow beyond the commodity business of online storage and into a suite of tools tailored for industries such as health care and retail.

The company's shares priced at $14, ending a year-long process amid tepid demand for cloud-computing stocks.

The pricing pegs Box's market capitalization at roughly $1.6 billion and raised $175 million in proceeds that will help the company support a high-cost business model dependent on sales and marketing.

The company, which will begin trading Friday on the New York Stock Exchange under the symbol BOX, had been looking to sell shares in the $11 to $13 price range.

Box's success as a public company will hinge on its ability to differentiate its offering amid increasing competition from tech giants like Microsoft Corp. and Amazon.com Inc., who have used their heft to offer online storage at lower and lower prices.

To do that, the 10-year-old company has built and acquired new tools to make it easier for employees within an organization to retrieve files and collaborate on documents. As it builds more of these tools, Box can go out to its customers and sell them more advanced services, said Forrester Research analyst Rob Koplowitz.

"That's a perfectly viable model, assuming you get the upsell," said Mr. Koplowitz.

Box hopes to specialize in areas such as medicine. Last year it acquired MedXT, an imaging technology that lets customers render and annotate medical images. Box has poached veteran executives from industries such as health care, law, retail and media to lead the company's expansion in those areas.

Chief Executive Aaron Levie said in December that his company is "just a couple months" into its strategy of building different services that cater to the unique needs of several different industries.

"We're starting to see that in each industry, the way you use data, the way you use information, the really transformational ways you use the cloud tend to be fairly different," Mr. Levie said.

The glare of Wall Street and growing pressure from competitors will challenge Box to move quickly.

Microsoft is going after Box with a beefed-up offering for its file-storage service OneDrive for Business, which offers enough storage space for roughly 200 high-definition digital movie downloads--at a lower monthly cost than Box. Amazon.com last summer also made available a Boxlike service called Zocalo that the Seattle company has offered free for companies that buy Amazon's "virtual" computers for employees.

Some portfolio managers considering purchasing Box in its IPO cite competition as one reason they remain somewhat hesitant.

David Rudow, a senior equity research analyst at Thrivent Asset Management who looked at the deal, says while he believes Box has a first-mover advantage in the cloud storage space, he worries about the pressure the company could get from bigger players.

"It will be critical for Box to see how they differentiate themselves from everyone else and how they get out of the Microsoft shadow," he said.

Box will also need to show it can rein in costs over time without eating into growth. The company's loss in the third quarter ended Oct. 31 narrowed to $45.4 million from $51.4 million a year earlier, partly because of lower sales and marketing costs. But revenue growth slowed to 70% from 81% in the previous quarter.

Despite the concerns, investors may be enticed to buy Box at a relative discount to its earlier valuation. The company's financing round over the summer valued Box at about $2.4 billion, according to Box's filings.

Box is also proposing a price at a far lower valuation than its peers, according to people familiar with the deal. Some of the analysts at the underwriting banks expect Box to generate about $280 million in revenue in 2015, which means the stock is priced at about 6 times forward revenue, they said. That compares with a group of online software firms, including Workday Inc. and ServiceNow Inc., which trades at nearly twice that multiple, according to FactSet.

Already one hedge fund that bought in before the IPO at $20 a share in July, Coatue Management LLC, purchased shares in the IPO, as outlined in a filing on Thursday, according to a person familiar with the deal. It wasn't clear whether Coatue bought the full allotment of 10% of the deal that the filing said the fund might buy. That will reduce the cost basis of their stake. Coatue and other funds that participated in the July round also received more stock in Box, as compensation for the deal coming below $20, according to the filing.

The largest investor in Box is venture-capital firm Draper Fisher Jurvetson, which will own a 19.2% stake valued at $322.5 million. Mr. Levie's stake after the offering is 3.4%, worth about $57.2 million.

Box's IPO is being led by Morgan Stanley, Credit Suisse Group AG and J.P. Morgan.

Shira Ovide contributed to this article.

Write to Corrie Driebusch at corrie.driebusch@wsj.com

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