B2 Cloud And AI Pipelines Will Expand Market Opportunities

Key Takeaways

• Expansion in B2 Cloud Storage and shift to enterprise customer focus could significantly boost revenue and sales productivity.
  
• Entry into AI and innovative solutions enhances market penetration, driving long-term growth and improved profitability.
  
• The pursuit of balanced growth and profitability faces execution risks, competitive pressures, and a declining consumer segment, threatening revenue and market share stability.

Catalysts

A storage cloud platform, provides businesses and consumers cloud services to store, use, and protect data in the United States and internationally.

• Backblaze is seeing a strong acceleration in B2 Cloud Storage growth, which grew 22% year-over-year and is now over 50% of the business. The focus on driving B2 growth through go-to-market transformation initiatives indicates significant potential for future revenue increases.
  
• The company's strategic shift to serve enterprise customers through direct sales and partnerships, including the hiring of experienced sales leadership, suggests potential improvements in sales productivity and customer acquisition, impacting revenue positively.
  
• Backblaze's investments in innovative solutions, such as the white label Powered by Backblaze offering, hint at increased market penetration and expansion in high-value customer segments, which could enhance earnings.
  
• The company's entry into the AI segment, serving data-intensive AI customers and leveraging AI data pipelines, represents a significant growth driver, likely bolstering revenue and earnings over the long term.
  
• Backblaze's strategic focus on becoming a Rule of 40 company, achieving over 30% growth in B2 by end of 2025, and its goal of being adjusted free cash flow positive by Q4 2025, suggests improved profitability and financial stability, enhancing net margins.

Backblaze Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Backblaze's revenue will grow by 13.4% annually over the next 3 years.
• Analysts are not forecasting that Backblaze will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Backblaze's profit margin will increase from -38.0% to the average US IT industry of 7.9% in 3 years.
• If Backblaze's profit margin were to converge on the industry average, you could expect earnings to reach $14.8 million (and earnings per share of $0.22) by about April 2028, up from $-48.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 69.7x on those 2028 earnings, up from -5.0x today. This future PE is greater than the current PE for the US IT industry at 32.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.27%, as per the Simply Wall St company report.

Backblaze Future Earnings Per Share Growth

Risks

• The transformation to become a Rule of 40 company, which emphasizes a balance between growth and profitability, suggests a significant challenge as this balance might impact profitability goals or revenue acceleration targets. This could put pressure on net margins.
  
• The company's plan to achieve adjusted free cash flow positive by Q4 2025, especially following a recent oversubscribed secondary offering, implies financial strain, necessitating careful management of operating expenses and potentially impacting earnings.
  
• The reliance on new customer acquisition and expansion of existing customers to drive over 30% B2 growth by the end of 2025 indicates high execution risk, which could lead to revenue shortfalls if not met.
  
• The potential decline in the consumer segment of the Computer Backup business, described as being in a long-term secular decline, could negatively impact overall revenue growth unless adequately offset by growth in business clients.
  
• The competitive landscape, including major players like Amazon, Google, and Microsoft, poses ongoing risks, with increased competition potentially affecting Backblaze's ability to maintain market share and thus impacting future revenues.

Valuation

• The analysts have a consensus price target of $12.317 for Backblaze based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.9, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $186.2 million, earnings will come to $14.8 million, and it would be trading on a PE ratio of 69.7x, assuming you use a discount rate of 8.3%.
• Given the current share price of $4.47, the analyst price target of $12.32 is 63.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.