Rising Costs And Competition Will Hamper SaaS Yet Spur Resilience

Key Takeaways

• Heavy reliance on a concentrated enterprise customer base and elevated operating costs could constrain revenue growth, net retention, and margin expansion amid economic or competitive pressures.
  
• Increasing competition, potential commoditization, and mounting product complexity may weaken pricing power, strain scalability, and limit long-term operating income improvements.
  
• Elevated churn, uneven IT spending, integration costs, expansion risks, and intensifying competition threaten revenue growth, margins, and pricing power despite ongoing preventative and efficiency measures.

Catalysts

Operates a customer engagement platform that provides interactions between consumers and brands worldwide.

• Although Braze is poised to benefit from the growing need for first-party data solutions amid global privacy regulations, the company's heavy dependence on recurring subscription revenue from a concentrated enterprise customer base exposes it to heightened churn and downgrading risk during periods of economic uncertainty, which could limit revenue growth and impact net retention rates in future quarters.
  
• While Braze's continued investment in AI-driven personalization, including the integration of OfferFit and Project Catalyst, strengthens its technological moat and supports higher deal sizes, the ongoing requirement for significant R&D and sales expenditure to remain competitive may keep operating expenses elevated, putting persistent pressure on net margins and slowing the pace of profitability expansion.
  
• As omnichannel engagement and data-driven marketing become more critical for brands, Braze stands to capture long-term uplift from the secular shift toward unified SaaS platforms; however, demand for such solutions could be undermined if widespread automation and AI tools accelerate commoditization, eroding Braze's differentiation and constraining pricing power, thereby dampening revenue growth and gross margin improvement over time.
  
• Even though Braze is gaining share by replacing legacy marketing clouds and expanding internationally, intensifying competition from larger, better-resourced cloud vendors and the proliferation of all-in-one engagement suites increases the risk that Braze may need to offer pricing concessions or accept lower growth in enterprise wins in order to defend market share, ultimately compressing margins and slowing earnings growth.
  
• Despite the company's recent pricing and packaging changes aimed at reducing friction and driving customer expansion, the rising complexity of digital marketing channels-and the resulting increase in product development costs-could strain scalability and delay meaningful operating leverage, limiting Braze's ability to deliver sustainable long-term improvements in operating income.

Braze Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Braze compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Braze's revenue will grow by 18.5% annually over the next 3 years.
• The bearish analysts are not forecasting that Braze will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Braze's profit margin will increase from -16.8% to the average US Software industry of 13.4% in 3 years.
• If Braze's profit margin were to converge on the industry average, you could expect earnings to reach $137.8 million (and earnings per share of $1.15) by about August 2028, up from $-103.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 42.3x on those 2028 earnings, up from -27.0x today. This future PE is greater than the current PE for the US Software industry at 38.1x.
• Analysts expect the number of shares outstanding to grow by 2.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.54%, as per the Simply Wall St company report.

Braze Future Earnings Per Share Growth

Risks

• Elevated churn levels and a seasonal concentration of renewals, especially among large enterprise customers, could depress dollar-based net retention and slow revenue growth if not fully mitigated by recent preventative efforts.
  
• The macroeconomic environment remains noisy and uneven, with uncertain enterprise IT spending, longer deal cycles driven by customer hesitancy around switching costs, and pockets of regional weakness such as Southeast Asia, all of which risk dampening recurring revenue growth and limiting operating leverage.
  
• The recent acquisition and integration of OfferFit introduces near-term pressure on operating margins, as its lower gross margin profile and incremental sales, marketing, and R&D costs offset Braze's otherwise improving expense ratios and may keep net income growth subdued until efficiency gains materialize.
  
• Increased investment in global expansion and verticalization, while broadening the addressable market, raises execution risks, especially in less penetrated regions and regulated industries where adoption may lag, thereby delaying anticipated revenue contributions and margin improvement.
  
• Intensifying competition from large incumbents like Salesforce and Adobe, as well as the ongoing industry trend toward consolidated marketing suites and commoditization of AI-driven engagement, could erode Braze's pricing power, require more frequent product innovation, and compress future earnings and margins.

Valuation

• The assumed bearish price target for Braze is $38.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Braze's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $68.0, and the most bearish reporting a price target of just $38.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $137.8 million, and it would be trading on a PE ratio of 42.3x, assuming you use a discount rate of 8.5%.
• Given the current share price of $25.31, the bearish analyst price target of $38.0 is 33.4% 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.