The new year has barely started but the red ink IPOs have already started. The latest is Box, Inc which filed with the SEC today announcing that would issue 12.5 million share at between $11 and $13 per share, for an expected $134 million total pull and a valuation as high as $1.5 billion. Like so many tech IPOs, Box (which will also have the ticker symbol BOX once it goes public), has a couple of years of high growth under its belt, but no profits to show for it.

The Box business model looks a lot like DropBox

Box offers free personal accounts (up to 10 GB of storage) for individuals to try out and then cheap packages for teams or small businesses, but their focus is on attracting enterprise customers. As of the end of October they had 32 million registered users and 44,000 paying organizations. The free accounts are an important part of the strategy because Box wants individual users to get used to their system, and then convince the people around them to register to make sharing easier, and eventually be adopted by the organization. It’s the same basic business model as DropBox, attempting to gain market share with teaser accounts and then use the network effect (it become inconvenient for people to switch if everyone they know uses Box) to build a moat around the business.

Marketing expenses are growing faster than revenue

Revenue fell from $21 million in 2011 to just $3.4 million in 2012, but since then it has jumped to $59 million in 2013 and $124 million in 2014. Losses from operations were $109 million in 2013 and $159 million. What’s more problematic is that marketing expenses grew from $4 million in 2012, to $99 million in 2013 and $171 million last year, which means that Box started off spending a little more than a dollar an advertising per dollar of revenue, and it’s now spending about $1.40. Value investors will basically always tell you to stay away from unproven companies like this, with the inevitable eye roll from growth-oriented investors, but those diminishing returns on advertising should be a red flag even for people who are willing to stomach the immediate losses (Box says it doesn’t expect to make money for ‘the foreseeable future’) for an eventual payoff.

Box financial statements 0115