Emerging AI Workloads Will Drive New Data Opportunities

Key Takeaways

• Surging AI-driven data demand and innovative high-value products are accelerating revenue growth, expanding margins, and improving customer acquisition and retention.
  
• Strategic enterprise focus, enhanced security features, and transparent pricing are boosting direct sales momentum, customer mix, and long-term profitability.
  
• Declining legacy revenue, competitive pressures, reliance on volatile AI demand, and regulatory risks threaten long-term growth, margins, and market diversification.

Catalysts

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

• The explosive increase in AI workloads is driving a step-function expansion in Backblaze's addressable market; AI customer data stored grew 40x year-over-year, and 3 of their top 10 customers are now AI companies, positioning B2 Cloud as a direct beneficiary of surging global data creation and accelerating secular demand-likely resulting in accelerated multi-year revenue growth.
  
• Ongoing product innovation, such as the launch of B2 Overdrive (with 250% higher pricing and strong initial uptake among multi-petabyte AI and high-performance users), answers increasing market needs for secure high-throughput storage and supports both top-line growth and potential gross margin expansion as higher-value products gain share.
  
• The transparent, value-oriented, and predictable pricing model is increasingly resonating with enterprises frustrated by hidden or unpredictable charges at hyperscalers, which should drive further customer acquisition and increase retention-contributing to organic revenue growth and improving net revenue retention rates.
  
• Strategic upmarket shift, partner expansion, and successful go-to-market transformation are evidenced by a 30% year-over-year increase in >$50K ARR customers and four consecutive quarters with a 7-figure customer, setting the stage for continued direct sales momentum, better customer mix, and improved operating leverage to bolster future earnings and margins.
  
• Heightened attention to data security and compliance is generating additional revenue opportunities via new AI-powered features (Anomaly Alerts, Legal Hold, etc.) and deepening enterprise adoption, with these capabilities expected to improve customer stickiness and drive incremental margin-accretive upsell/expansion.

Backblaze Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Backblaze's revenue will grow by 14.3% 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 -31.7% to the average US IT industry of 6.4% in 3 years.
• If Backblaze's profit margin were to converge on the industry average, you could expect earnings to reach $13.0 million (and earnings per share of $0.19) by about September 2028, up from $-43.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 77.6x on those 2028 earnings, up from -10.9x today. This future PE is greater than the current PE for the US IT industry at 32.4x.
• 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 9.13%, as per the Simply Wall St company report.

Backblaze Future Earnings Per Share Growth

Risks

• The Computer Backup segment, a significant portion of Backblaze's legacy revenue, is in secular decline as consumer demand shrinks and device usage changes; management expects low to mid-single digit quarterly declines ahead, which could put long-term pressure on total revenue growth and customer diversification.
  
• Net revenue retention (NRR) rates are trending downward for B2 Cloud Storage (down to 112% from 126% YOY and from 117% sequentially), with management noting this was partly due to lapping prior price increases, indicating limited ability to generate meaningful expansion revenue or price increases in the medium term and a stabilization, not acceleration, of expansion trends-potentially limiting long-term earnings growth.
  
• The company's growth resurgence in B2 was heavily influenced by a few large AI customers and a "big ramp-up" in AI workloads; while management is optimistic about AI, this exposes Backblaze to volatility and concentration risk if AI storage demand slows or migrates to larger hyperscalers and multi-cloud incumbents, which could compress revenue and margins.
  
• The cloud storage industry remains intensely competitive and commoditized, with hyperscale providers (like AWS, Azure, Google) able to engage in price wars and squeeze gross margins for smaller vendors; Backblaze's focus on low-cost value is a competitive advantage today, but over the long run, sustained downward pricing pressure can erode profit margins and impede operating leverage.
  
• Secular enterprise trends such as the shift to edge computing, self-managed or hybrid storage, and evolving data privacy regulations (GDPR/CCPA) could dramatically limit Backblaze's addressable market or create compliance overhead, resulting in higher operating expenses, profitability challenges, or restricted revenue growth in geographically regulated markets.

Valuation

• The analysts have a consensus price target of $11.3 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 $8.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $204.8 million, earnings will come to $13.0 million, and it would be trading on a PE ratio of 77.6x, assuming you use a discount rate of 9.1%.
• Given the current share price of $8.4, the analyst price target of $11.3 is 25.7% 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.