BLZE - Backblaze: I Am Not Blazed Away

Summary

• Backblaze continues to see real margin struggles.
• The company is upping attention and focus on this area, yet has no results to show for it yet.
• Proof of execution lies with the management team, as the team has quite some to prove here.

Shares of Backblaze ( BLZE ) have come to life a bit in recent days as the prospects for lower interest rates fuel shares higher. In May, I concluded that the company was far from reporting black numbers, as the data storage cloud platform reported increasing losses to maintain sales growth, leaving no green shoots in sight.

A Recap

Backblaze offers a cloud-based storage platform on which customers can store data in a secure and safe manner, while data can easily be retrieved by its consumers and SMBs customers.

With 29 million shares outstanding and shares going public at $16 per share in 2021, the company was valued at $470 million, as that number included a hundred million net cash position. The remaining $370 million operating asset valuation was awarded to a business which generated $41 million in sales in 2019 on which a million operating profit was reported, a minimal amount, but at least a profit.

While revenues rose 32% to $54 million in 2020, the company did see some deleverage on the bottom line with an operating loss of $4 million being reported. Sales rose another 24% in the first half of 2021, with revenues reported at $31.5 million, as operating losses increased to $6.5 million. The cocktail of slower growth and increasing losses is concerning.

With revenues trending at around $70 million a year, the 5 times sales multiple looked reasonable, yet losses were on the increase and growth was slowing down, as this and competition from formidable competitors made me quite cautious.

The stock got carried away during the momentum run later that year, hitting an intermediate high of $36, but by May of this year shares were down to $5 per share. The reason for that is simple. Third quarter sales rose 25% to $17 million and change as a GAAP loss of $6 million was reported.

Fourth quarter revenues rose 28% to nearly $19 million, yet GAAP losses came in at nearly $10 million. The issue was that a full year guidance for 2022 called for sales to come in around $83-$86 million, with no margin gains expected, in fact the contrary.

I May, the 30 million shares traded at $5, for a $150 million valuation, still including a net cash position of $99 million, resulting in a mere $50 million operating asset valuation. These valuations are tiny, yet a first quarter GAAP loss of $12 million reveals a steep cash burn.

Calling the fundamental story uninvestable, given the huge losses, the best investors could hope for is M&A speculation of perhaps a genuine turnaround, yet few signs were hinting towards such a situation, at least that was my concluding take in May.

Stagnating

Since May, shares traded range bound between $4 and $8 per share as shares rallied to a high around $8 per share in August, now settling around $4 and change.

The momentum in August was driven by solid second quarter results with sales up 28% to nearly $21 million. An operating loss of $10.8 million narrowed a bit on a sequential basis, albeit that net cash balances are gradually coming down as the full year sales guidance is seen with revenues at a midpoint of $84.5 million and EBITDA losses around minus 15%.

In October, the company announced preliminary third quarter results which revealed a small revenue beat versus the previous guidance, accompanied by narrowing losses (than expected) which is promising. In November, third quarter results were reported with sales up 27% to $22 million, albeit that a GAAP operating loss was reported at $12.0 million which makes that even if the EBITDA loss is narrowing, the GAAP losses remain huge by all means.

Net cash is down to $80 million here as 32 million shares outstanding value equity at $160 million at $5 per share. This makes that the operating asset valuation has increased to $80 million, up a bit from $50 million in May, mostly because of dilution and depleting net cash balances. The issue remains with the actual performance, and while growth is quite solid, losses remain huge by all means.

Sticking To A Cautious Stance

The problem is that a profitable business in the early part of 2021, still posts losses equal to 50% of sales here, which is worrying. The good point is that growth is still solid, and that net cash balances allow for current losses to be financed for quite some time to come (about two years time).

The issue is that while the current sales multiple is low, I did not see many encouraging signs that the company is really able to deliver on significant profits, even as margins are a point of focus here, leaving me cautious and still sitting on the sidelines.

For further details see: