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Why Box May Be the Next Hot M&A Target

Stocks in this article: MSFTGOOGAMZNRAXHPQIBMTCTXSORCLSYMCEMC

"So I think that Box certainly will have steep competition from the major, existing cloud providers out there today and it's really a question of can they stand up to that competition," said Ruth. "Long term, it's not good enough to offer a separate island of capability just within Box. They're going to need to interoperate with the likes of Symantec (SYMC), EMC (EMC) and IBM (IBM) in terms of those infrastructures that are implemented in big datacenters that are stretching and using Box as well," Ruth explains.

The crowded population of large cloud storage vendors that are increasingly recognizing that file sync share solutions are becoming an important element of their cloud storage services include Google (GOOG), Amazon (AMZN) Web Services (AWS), Microsoft (MSFT), Rackspace (RAX), HP (HPQ), IBM and AT&T (T). Already, Google offers Google Drive, which is more focused on consumers, but there has been a move there into the business space as well. Meanwhile, Microsoft has OneDrive for Business, which is very tightly wound around Office 365. Ruth notes that Rackspace, HP and AT&T in particular could benefit from having a very solid, file sync and sharing solution such as Box to add to their already existing cloud offerings.

In general, Ruth, who speaks with Box regularly, thinks that Box has a good understanding of the market it operates in, also saying that the company has to do some cleaning-up of its back end systems to cope with its rapid growth. Overall, from a technical and vision perspective, the company is on "good track," he says.

Rao concurs, adding that "Google, Microsoft, and Citrix (CTXS) can do whatever these guys do, but their specialty is mobile. They're a native, mobilecloud-based platform, specifically a pure-play on that side. Their cloud-based, mobile platform is targeted at companies that want to move away from the legacy or expand from that legacy infrastructure and premise to move to the cloud."

"A number of companies want to go with nimble companies like Box who can really do things fast, move with the flow and offer services at a more personalized level," he added.

Although Box is not yet profitable or mature yet, investors are giving the company the benefit of the doubt, said Rao. A lot of the larger vendors may provide services that are easier and cheaper to use, but as enterprise needs grow more complex, they're choosing Box, whose products may come with a higher difficulty level, but are more in tune with the needs of businesses.

Ruth's daily conversations with Fortune 1,000 clients indicate that there's still a substantial number of enterprises that remain uncomfortable with putting data in the public cloud and any administrative and operational difficulties that could come with the shift. The analyst estimates that there is currently an 80/20 split where 80% of clients are interested in building on-premise, file sync and sharing solutions, vs. 20% who are seeking external cloud solutions.

That being said, given that there aren't many companies who have the credibility that Box has to offer business solutions as an externalized service and that it has been a go-to company for enterprises feeling pressured to set up quickly in a credible environment, its name comes up very frequently during client calls across the board as a reference point to consider, says Ruth.

Paul Hughes, IDC's program director of storage and data management services says that as long as the company's billings growth remains strong and free subscriber growth tapers, the beginnings of a breakeven model will been seen. "Box has used a ton of money to virtually target every vertical," said Hughes.

-- Written by Andrea Tse in New York
Follow @atwtse
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