akinbostanci
Investment Thesis
Braze (NASDAQ:BRZE) stock’s expectations are relatively muted, even as the company is delivering strong results.
I make the case that this stock is now on the point of inflection. Succinctly put, I believe that Braze could within the next 12 months, be on a forward run-rate of +5% non-GAAP operating margin.
Consequently, I argue that in the next twelve months, this business will grow its revenues by at least 25% CAGR and that paying 10x forward sales, for a profitable cloud business is mighty attractive.
Why Braze? Why Now?
Braze is a company that helps other businesses engage with their customers in a more personalized and effective way. They provide a platform that allows companies to send targeted messages and campaigns to their customers across various channels like email, SMS, and social media. This could include things like personalized promotions, announcements, or updates. Braze’s platform also incorporates advanced technologies like artificial intelligence to help companies understand their customers better and optimize the timing and content of their messages.
Braze is a bit like Twilio (TWLO). Braze primarily focuses on marketing and personalized messaging, while Twilio’s broader spectrum includes various communication needs. Also, their use cases are slightly different. Braze is commonly used for marketing campaigns, user engagement, and building customer relationships, while Twilio’s applications span a wider range, including building communication tools, customer service applications, and more.
Moving on, Braze’s strength lies in its enterprise business, with a focus on operating efficiency and substantial improvements in non-GAAP gross margin and non-GAAP operating margin (more details on this momentarily).
As it continues to secure major clients and win against both startup competitors and legacy solutions, Braze positions itself strongly in the customer engagement market. The company’s emphasis on AI-driven innovation demonstrated through feature flags and upcoming additions to the Sage AI suite, aligns well with the evolving needs of marketers, enhancing their ability to orchestrate personalized cross-channel customer engagement seamlessly.
However, despite these positive aspects, Braze faces near-term challenges, primarily influenced by the uncertain macroeconomic environment. While the company navigates through a challenging landscape, it anticipates potential headwinds in fiscal 2025.
The impact of these macroeconomic uncertainties is evident in elongated sales cycles, constrained marketing budgets, and slower growth in new business. The SMB segment, in particular, presents challenges with fewer new customer additions and higher logo losses attributed to the tougher market conditions.
Despite favorable competitive positioning and net positive competitive flows, Braze recognizes the need to address challenges in the SMB market.
As a reference point, see if you spot a general trend in Braze’s customer adoption below:
- Fiscal Q2 2023: 43% y/y
- Fiscal Q3 2023: 38% y/y
- Fiscal Q4 2023: 29% y/y
- Fiscal Q1 2024: 24% y/y
- Fiscal Q2 2024: 23% y/y
- Fiscal Q3 2024: 17% y/y
On the one hand, I find this deceleration concerning. On the other hand, I feel relatively reassured that its customer adoption is likely to remain at +10% throughout fiscal 2025.
Next, let’s discuss Braze’s fundamentals.
Revenue Growth Rates in Fiscal 2025, 25% CAGR
BRZE revenue growth rates
Braze’s guidance for fiscal Q4 2024 points to approximately 26% CAGR. But given that management has on average beaten revenue estimates by 3% in the past 2 years, with each quarterly report, this reassures me that Braze should see 29% CAGR in fiscal Q4 2024.
Furthermore, since Braze’s fiscal Q4 comparables with the prior year are lower than they were in fiscal Q3 2024, this strengthens my assertion that in fiscal Q4 2024, Braze should be seeing approximately 29% CAGR.
Therefore, given that each quarter of fiscal 2024, Braze will most likely have delivered +29% CAGR, I believe that assuming that Braze delivers 25% CAGR for fiscal 2025, strikes me as a very achievable hurdle.
Next, consider what analysts following Braze expect from its growth rates for its upcoming quarters.
SA Premium
What you see here is that analysis following Braze expect the company’s growth rates to continue decelerating into fiscal Q2 2025. For my part, I believe this is at odds with my own estimates.
Naturally, The Street is being conservative with its guidance, to allow for them to later on increase their new targets. But this discrepancy of 21% CAGR with mine, that I believe to be extremely conservative, is nothing but bullish.
With this framework in mind, let’s discuss BRZE’s valuation.
BRZE Stock Valuation — 10x Forward Sales
Given what we’ve discussed higher up, I believe that Braze could see approximately $590 million of revenues as a forward run-rate, at some point in the next 12 months.
This implies that investors are paying 10x forward sales for Braze, rather than 13x forward sales depicted in the graphic above. If that’s all there was to this investment thesis, I wouldn’t be overly enthused. But this next element is where the bull case is found.
Back in fiscal Q4 2023 (last year’s Q4) Braze had negative 26% non-GAAP operating margins. Whereas this year, management expects to finish with negative 6% non-GAAP operating margins or slightly better, meaning that Braze’s non-GAAP operating margins will probably end around negative 5% non-GAAP operating margins.
Accordingly, given that in 12 months, Braze has gone from negative 26% to negative 5%, an improvement of 2,100 basis points, I therefore believe that a further 1,000 basis point improvement could perhaps be on the cards.
This means that at some point in the next year, Braze will be viewed as a rapidly growing business, that’s profitable. Add to this outlook a futuristic and compelling narrative, and all of a sudden, this stock re-rates higher.
The Bottom Line
In contemplating Braze stock’s trajectory, the current anticipation seems relatively subdued despite the company’s robust performance.
I posit that Braze is poised at an inflection point, potentially achieving a forward run-rate of over 5% non-GAAP operating margin within the next 12 months. Foreseeing a solid growth trajectory, I argue that the business could achieve a +25% CAGR in revenues over the next twelve months, presenting an attractive proposition at a valuation of 10x forward sales for a profitable cloud-oriented company.
Despite the deceleration in customer adoption rates, the fundamentals, highlighted by an expected 25% CAGR in fiscal 2025, instill confidence. The conservative growth estimates by analysts and a potential further improvement in non-GAAP operating margins from the current -5% to a profitable status within the next year further bolster the bullish case for Braze’s valuation.
In essence, Braze’s evolving narrative and improved financial standing could pave the way for a significant re-rating in its stock, making it a compelling investment opportunity.
