TU IS
Investment Thesis
Braze, Inc. (NASDAQ:BRZE) provides a platform for businesses to engage with their customers across various channels like emails and app notifications, think Salesforce (CRM) or HubSpot (HUBS). They specialize in personalized messaging, helping businesses communicate with their customers.
Braze’s bull case is focused on this company’s fast progression towards break-even profitability. The bear case that hangs over the stock is the key question of whether Braze’s days as a fast-growing business are now in the rearview mirror? Simply put, was Braze a flash in the pan? Or is there still more juice left in this tank?
Meanwhile, Braze has a very strong balance sheet and operates debt-free. In sum, I remain tepidly bullish on this stock but argue that Braze needs to improve its growth outlook; otherwise, this stock is primed for a sell-off.
Rapid Recap
In January, I said in a bullish article:
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.
Since then, we’ve had another set of results and Braze’s updated full-year guidance.
Author’s work on BRZE
With the benefit of hindsight, I made a bad call here. Nonetheless, I believe that for now, this stock still has a lot going for it. Namely, I believe that its bull case can be reignited if Braze can stabilize and reaccelerate its growth rates.
Braze’s Near-Term Prospects
Braze’s near-term prospects appear to focus on advancing its Customer Engagement Platform to enhance personalized customer experiences.
However, Braze faces several near-term challenges that warrant attention. Braze operates in a selling environment characterized by budget constraints, which continues to pose challenges to revenue growth and new business acquisition.
As a reference point, consider the following trend in Braze’s customer adoption curve.
- 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
- Fiscal Q4 2024: 15% y/y
This customer adoption curve doesn’t inspire a whole lot of confidence, and forces a lot of pressing questions onto Braze’s outlook for fiscal 2025.
Revenue Growth Rates Point to Substantial Deceleration
BRZE revenue growth rates
Braze is a young, growing business. This means that for now, it has to deliver strong, consistent, and predictable growth rates, with the occasional positive surprise to the upside. Yet, what its guidance implies is a significant deceleration after fiscal Q1.
Of course, management will be striving to be prudent with its guidance. Of that, I have no doubt. Nonetheless, there’s still too large a gap between fiscal Q1 and the remainder of fiscal 2025.
To put this more concretely, presently it seems that once we get past fiscal Q1 2025, its growth rates will meaningfully decelerate. And if that’s the case, I question whether this stock is truly worthwhile considering? Particularly in the context of its valuation.
BRZE Stock Valuation – 7x Forward Sales
Braze guides for a negative 7% operating margin for fiscal Q1, 2025. Given that, for the year as a whole, Braze points to negative 3%, I believe that there’s a substantial likelihood that Braze will reach breakeven in the next 12 months.
So, as it stands right now, we have a business that may reach breakeven profitability in the next twelve months. That’s undoubtedly bullish for investors. But is that enough of a bullish consideration to support its valuation?
On the surface, I’m inclined to believe that paying 7x forward sales for Braze is sufficiently cheap. After all, you have a business with more than 10% of its market cap made up of cash and equivalents and no debt. But at the same time, I’m clear that this investment thesis is not blemish-free.
The Bottom Line
Looking at Braze’s near-term prospects, its road to profitability is overshadowed by substantial challenges, particularly concerning growth rates. As a young and growing business, Braze must deliver strong and consistent growth rates to maintain investor confidence and a high premium on its stock.
Yet, recent trends suggest a significant deceleration in revenue growth, raising doubts about the company’s trajectory for fiscal 2025. Despite management’s efforts to be prudent with guidance, the gap between fiscal Q1 and the remainder of the year is concerning.
While the prospect of reaching breakeven profitability within the next twelve months is promising, Braze’s valuation at 7x forward sales raises questions about its ability to justify investor optimism amidst slowing growth rates.
