Braze: Staying Positive On The Business Given The Strong Execution So Far
[Braze, Inc.(BRZE)](/symbol/BRZE?source=content_type%3Areact%7Csection%3Amain_content%7Csection_asset%3Ameta%7Cfirst_level_url%3Aarticle%7Csymbol%3ABRZE)
Summary
– Braze is benefiting from growing interest in first-party data and vendor consolidation.
– The company’s use of AI and ML features to anticipate customer behavior and deliver high ROI to clients further strengthens its market position.
– There is potential for valuation to move higher than 8x as BRZE moves towards EBITDA breakeven.
Summary
Braze (NASDAQ:
BRZE) is a leading customer engagement solution enabling brands to drive multi-channel, highly personalized, real-time engagements with their customers.Brands can attract and onboard new customers, engage existing ones, or promote greater customer retention with the help of BRZE’s comprehensive platform, which allows them to engage customers in the channel of their choosing with real-time, relevant, contextual messaging.To me, BRZE’s excellent growth plus profit profile is a result of the company’s distinctive market position in an area where it is increasing importance due to the worldwide acceleration of digital transformation.I believe my recommendation, which focused on BRZE’s ability to capture the demand opportunities from the accelerating digital transformation around the world and vendor consolidation, has played out well with the stock now up ~30% since my coverage in April.The impressive 1Q23 results, which revenue grew 31% y/y, driven by 33% y/y subscription revenue and billings growth acceleration, and faster than expected path to profitability (margins came in better than consensus expectation), are a major contributor to the strong share price performance.
Despite the company’s warnings about the macro environment, the results show that the changes BRZE made to its sales motion in the past proved successful, leading to higher sales productivity.The continued trend toward vendor consolidation also lends support to BRZE’s strengths, helping the company capture market share from both traditional marketing clouds and point solutions.I continue to be optimistic about Braze’s long-term potential due to its strong execution despite the uncertain macro environment.
Secular trend
In my perspective, BRZE is riding high on the wave of growing interest in first-party data.Primarily, first party data is superior to third party data because it is obtained directly from the intended audience, rather than via a third party.
Therefore, first party data is far more trustworthy, but it is also considerably more challenging to get because most businesses lack the necessary means.However, once businesses have amassed sufficient first party data, they may describe a first party connection, which in turn can be utilized to motivate client involvement and action.This is an important step as it points businesses to the right direction, in that they now can alter their approach to the market to generate additional revenue.In my opinion, this is a long-term secular trend that will be beneficial to Braze.
As a result, companies further down the adoption curve will be “forced” to adopt first party data out of fear of losing market share to the frontrunners.Let’s also not forget that 3rd party data constantly faces the risk of regulatory stepping in, hence, businesses that rely on 3rd party data are always at risk.
Strong ROI forms a virtuous cycle
I think the secular trend will eventually propel BRZE into a much larger company as the current base of customers grow their billings with BRZE.
A key assumption I made here is that customers are unlikely to churn given BRZE delivers attractive ROI.BRZE is able to achieve this because it focuses on marketing to MAUs (i.e., acquired customers), and because its product offers a high ROI, which in turn encourages businesses to adopt new channels, purchasing higher quantities of messages and expanding to other additional regions and departments within a business.The ability to show high ROI in times like today enhances BRZE’s ability to drive in more demand as customers are going to focus on retaining and expanding relationships existing consumers – which is where BRZE specializes.
AI opportunity
With years of experience selling products with built-in AI/ML features, BRZE is no stranger to generative AI.Using its own unique ML models, BRZE is able to anticipate which clients are more likely to make a purchase or more likely to churn, and then sell that information as an add-on to its main service.
When combined with the rich first-party data that Braze gathers from its customers’ end users, these models become extremely potent.
Now that AI has come into the spotlight, more businesses will presumably consider the repercussions of using the technology and evaluate potential vendors.I think BRZE will do well in this evaluation because its products meet the criteria.
Valuation
As the stock has rallied strongly post my previous coverage, my expected upside for the stock is much lesser now.I expect BRZE to grow low to mid 20 percent, and made a conservative assumption in assuming the market will not attach a higher valuation multiple to the stock (I assumed 8x forward revenue, the current multiple).
I see potential for further rerating as BRZE marches towards EBITDA breakeven, which should trigger another wave of investors into the stock (those with mandate restricting investments in loss-making companies).
Risks
Since BRZE must also compete for limited marketing resources, the overall reduction in marketing expenditures will have a negative effect on the company’s performance.It would not surprise me if the economy went into a deep recession due to the current macro conditions.The mitigating factor here is that BRZE can continue to capture share as organizations consolidate vendors.
Conclusion
BRZE has positioned itself as a leading customer engagement solution, benefiting from the growing interest in first-party data and the trend toward vendor consolidation.The company’s strong growth and profitability, along with its ability to deliver high ROI to customers, make it well-positioned for long-term success.The use of AI and ML features further enhances its competitive advantage.While the stock has already seen significant gains, there is potential for further rerating as BRZE moves towards EBITDA breakeven.
Overall, I remain optimistic about Braze’s future prospects due to its strong execution and ability to capture market share in an evolving digital landscape.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions.I am not receiving compensation for it (other than from Seeking Alpha).I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results.No recommendation or advice is being given as to whether any investment is suitable for a particular investor.Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole.
Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank.Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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