BRZE - Braze: Sustaining Revenue Growth And Impressive Returns Yet Profitability Remains Elusive

2023-10-04 00:13:41 ET

Summary

• Braze exceeds Q2 2024 EPS and revenue expectations, however the company remains unprofitable.
• Braze has compelling AI driven marketing technology that is attracting large customers and maintaining its customer base.
• Cautious of high short interest and no profitability predicted until end of FY2025.

Braze is a prominent player in the marketing technology industry for mid-to-enterprise markets. Despite the competitive environment, the company is successfully attracting and retaining customers. Braze consistently increases its top-line growth while incorporating in-demand technologies into its solution. Braze, Inc. ( BRZE ) recently released its Q2 2024 results , surpassing EPS and revenue expectations. The company went public in November 2021 at $65 per share, and although the share price has decreased, investors have still been rewarded with a 28.78% return over the last year.

Although the company is still in its initial phase and hasn't generated any profit yet, the increasing number of long-term customers is a promising sign indicating significant growth potential in the future. Therefore, I suggest maintaining a hold rating and waiting for a better entry point.

Company overview

Braze, Inc. is a prominent customer engagement and marketing technology player. Bill Magnuson founded the company, which focuses on personalised cross-channel customer engagement through its software-as-a-service ((SAAS)) solutions. These solutions use AI to keep customers engaged. Braze's mission is to help businesses create meaningful customer interactions regardless of industry, size, or location. They serve a substantial number of large enterprise clients, with no single industry contributing more than 25% of their Annual Recurring Revenue ((ARR)), showcasing their adaptability.

The company's revenue primarily comes from new business and upselling to existing customers. Approximately 95% of its income is derived from subscription revenue, resulting in an attractive gross margin of 70%. This margin has improved from 66.7% over the past two financial years. Notably, the company has joined the Russell 3000 index , reflecting its growing stature. With a customer count of 1,958 across 72 countries, it has experienced a robust 22% year-over-year growth. Furthermore, about 43% of Braze's revenue is generated internationally, highlighting its ability to serve a global customer base and adapt to varying market conditions.

Braze maintains a robust financial outlook, aiming to attain positive quarterly non-GAAP operating income and positive quarterly free cash flow by the conclusion of FY 2025.

Financials and valuation

Braze has consistently exceeded EPS expectations in the past eight quarters and demonstrated steady growth in its revenue. Despite this track record, it's important to note that the company has not yet achieved profitability.

In its Q2 2024 report, Braze reported a year-over-year revenue growth of $115.1 million, which is a substantial 33.6% increase. Additionally, the company's net loss slightly decreased to $32 million.

Reviewing the balance sheet and cash flow statement for Q2 2024, the company held a strong cash position of $476.2 million, including cash equivalents, restricted cash, and marketable securities. Regarding cash flow from operations, there was a cash usage of $17.5 million in the quarter, a slight increase from $16.3 million in the same quarter the previous year. However, the company's free cash flow showed improvement, with a negative free cash flow of $18.7 million, compared to a negative $24.7 million in the previous year's quarter. This positive trend can be attributed to reduced capital expenditures, with the prior year's cash flow impacted by the expansion of the London office.

The stock is trading below its Wall Street average price target of $56, even though it has consistently outperformed the S&P 500 index over the past year, delivering an impressive return of 71.88% in the last nine months. While the company is achieving double-digit revenue growth, it's worth noting that its year-over-year growth needs to catch up to its three-year CAGR. An ongoing concern for investors is that the company has yet to turn a profit, although it anticipates doing so by the end of 2025.

Risks

Investing in a newly public company involves inherent risks that should not be ignored. While Braze is confident in its ability to overcome challenges and achieve its long-term financial goals, its limited historical performance and lack of profitability create uncertainties. Early investment may yield rewards should the company prosper, but it also carries the potential for significant losses if financial targets are unmet. It's important to note that in the past year, there has been a considerable amount of insider selling activity, which could signal negative sentiment towards the company.

Final thoughts

While this company is successfully onboarding significant customers and benefits from a healthy balance sheet to support future growth, it's important to note that it has yet to achieve profitability and is currently experiencing negative free cash flow. Additionally, the relatively high short interest of 10.28% suggests some market scepticism. Given these factors, I recommend adopting a "wait and see" approach with a hold rating until there is more clarity on the company's financial performance and market sentiment.

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