BLZE - Backblaze: Cloudy Outlook For The Cloud Player

2023-08-04 13:14:07 ET

Summary

• Backblaze, Inc. has seen stagnant share prices and no margin gains despite solid sales growth.
• The company's net cash holdings are depleting rapidly, leading to substantial losses and potential financial struggles.
• Despite sales growth, operating losses continue to increase, making the stock unappealing and risky.

In November, I concluded that I was not blazed away by shares of Backblaze, Inc. ( BLZE ) as it saw continued margin struggles, even as the company started to focus more on margins. With proof of execution sitting with the management team, management had quite something to prove here.

Fast-forwarding nearly a year in time, we have seen shares trade quite stagnant. While the company has seen solid topline sales growth in the meantime, no margin gains have been delivered upon, in fact the contrary has happened.

With net cash holdings depleting rapidly, and losses being substantial, I see no easy solutions here and likely financial struggles down the road, making the situation rather uninvestable from my point of view.

Secure And Safe Cloud Storage

Backblaze offers a cloud-based software platform in which customers (in the case of Backblaze mostly being consumers and SMB customers) can store data in a secure and safe manner, with data being easily retrievable by these same customers.

The company went public in 2021, when the 29 million outstanding shares were valued at $16, granting the company an $470 million valuation, which furthermore included a hundred million net cash position. The resulting $370 million operating asset valuation was applied to a business which generated $41 million in sales in 2019, on which a minimal operating profit of $1 million was reported, but at least it was a profit.

Revenues rose by 32% to $54 million in 2020 as the company saw margins deleverage, with operating losses reported at $4 million. Revenues rose another 24% in the first half of 2021 with sales reported at $31.5 million, but operating losses increased to $6.5 million. With revenues trending around $70 million a year, a resulting 5 times sales multiple looked reasonable, but losses were increasing and growth was slowing down, with formidable competition hurting the business.

Shares rose to a high of $36 soon after the offering, that is the fall of 2021, but ever since it was all going downhill, as shares traded at just $5 per share in the summer of 2022. This resulted in a mere $150 million equity valuation, which at the time included a $100 million net cash position, meaning that operating asset valuations were very modest at around $50 million.

This dismal situation made investors close to hopeless, as even as sales were growing, as operating losses kept increasing. Second quarter sales for 2022 were up 28% to $21 million, as an operating loss of $10.8 million was huge, depleting net cash balances. This was the case as third quarter sales rose by 27% to $22 million, with GAAP operating losses reported as high as $12.0 million.

With the margin work being heavy (after the business was profitable in the past) I was very cautious, and not willing to engage, as the burden of proof lies with management.

And Now?

Fast forwarding between late 2022 and today, shares of Backblaze have traded rangebound between $4 and $8 per share, currently trading at $5 and change.

In February, the company posted a 23% increase in fourth quarter sales to $22.9 million, yet operating losses increased further to $13.8 million, as the outlook was quite concerning. For 2023, the company guided for sales to increase to a midpoint of $100 million, plus or minus two million, up from $85 million in 2022. Full year 2023 EBITDA margins were seen between minus 6 and 10% of sales, which compares to a negative EBITDA margin of 11% in 2022. Given the increased focus on margins, that looks quite disappointing to me.

First quarter sales rose by 20% to $23.4 million, as GAAP losses rose further to $16.8 million, while the company maintained the full year guidance, being hardly comforting. By now the net cash balance has been depleted to $43 million, and is rapidly coming down, as dilution makes that the share count has risen to 34 million shares.

Trading at $5 and change, the company commands a market value of $175 million, or about a $130 million operating asset valuation. This has actually moved up, and while sales growth is comforting, the fact that operating losses keep increasing, instead of coming down, is worrying.

The pace of operating losses is huge in relation to the revenue base and the net cash balances, which makes it very hard for me to see how Backblaze, Inc. can escape financial difficulties in the upcoming period.

This makes me still very cautious on the business, so I absolutely see no reason to get involved with Backblaze, Inc. stock here.

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