Braze (NASDAQ:BRZE) is a modern customer engagement platform competing with both big CRM players and, more critically, smaller SaaS players in the market for SMB customers. It shows some strengths, including relatively bullish Q2 results on the surface, but deeper, longer-term trends related to customer adoption slowdown and revenue growth rate contractions are concerning. As a result, its current price-to-sales ratio is vulnerable to further contraction, and the long-term alpha thesis is somewhat weak.

Operational Analysis

Braze is a customer engagement platform that helps brands personalize their targeted campaigns across multiple channels. Its offerings allow brands to engage with customers through email, SMS, push notifications, in-app messaging, and more. Research conducted by Braze indicates that brands that message users via two channels see a 2.2 times lift in average user lifetimes. Specific case studies, like a 135% increase in purchases attributed to CRM and a 2X increase in the conversion rate for messages for a company called Too Good To Go using Braze, underscore the effectiveness of its offerings.

Despite the intention of the company and the strength in some of its case study results, the innovation in its offerings is not particularly distinct, in my opinion. I believe that many of its programs could be easily replicated by other, larger companies like Salesforce (CRM) and even implemented in-house by SMBs with tailored IT teams. For example, Salesforce Marketing Cloud, although more complex and expensive, has comprehensive solutions covering much of the same ground as Braze. However, setting up with Braze is much simpler than with Salesforce, requiring fewer third-party integrations, so Braze is positioned well to support SMBs on a smaller budget.

For a peer analysis, the most significant publicly traded companies that Braze competes with include Salesforce, Adobe (ADBE), Twilio (TWLO), and another lesser-known but still significant player in the customer engagement field called Klaviyo (KVYO). Klaviyo is particularly strong in the e-commerce sector, with a deep integration with major online retail platforms, allowing businesses to automate email, SMS, and push notifications based on customer data from these platforms. Like Braze, it is also very attractive for SMBs due to its cost-effectiveness compared to Salesforce and Adobe suites.

Q2 2025 Earnings Analysis

Braze recently had its Q2 results, released on 9/5/24. It beat the actual normalized EPS estimate by $0.12 and the actual GAAP EPS estimate by $0.09. It also beat the revenue estimate of $145.50M by $4.18M. These are all reasons to be bullish on the surface.

However, from the earnings presentation, the following image is particularly notable to me. While revenue is growing, the rate of YoY revenue growth is slowing down. This affects the investment case, which will become clearer in my valuation analysis below.

However, its non-GAAP gross margin, while notably weak in Q1, has shown resilience in Q2, up from 67.9% to 70.9%. This is important because it shows that management is potentially positioned to continue to expand margins despite a slowdown in revenue growth. I believe it will be most able to execute this on the operating margin level with lean operating measures to drive investor sentiment moving forward.

Another area to note is that while the total number of customers is increasing, the rate of customer growth is slowing substantially. That being said, management is showing strength in a slight uptick in the adoption of customers with over $500K ARR. Despite this strength in larger customer acquisitions, the declining growth rates are still concerning and are likely to affect the overall growth sentiment in the stock market if the trend continues.

In the Q2 earnings call, management mentioned that the company is benefitting from a legacy marketing vendor replacement cycle, where businesses are replacing outdated systems with flexible, real-time platforms like Braze. Management also mentioned that international growth is now contributing to 45% of revenue. Furthermore, as all companies have to do to stay competitive now, management is investing in AI, and the Braze Data Platform partners with major data companies like Snowflake (SNOW), Databricks, and Amazon (AMZN) Redshift. However, there is arguably not enough focus on automation and cost reduction here, which I will outline in my risk analysis.

However, management also mentioned that the challenging macro environment has elevated churn and lowered expansion rates, which it says could persist in the near term. However, I am not sure it is just the macro environment but also a long-term trend in business toward lean operations, which could prevent services like Braze’s from being adopted at scale, reducing growth rates for the company more than it currently anticipates. Management noted that the pressure from the macro environment was reflected in its lower dollar-based net retention rate of 114%, signaling slower upsell activity and optimization of existing contracts.

Turning to guidance, management raised its guidance for Fiscal 2025, outlining total revenue for FY25 of 24% YoY and a non-GAAP operating loss at a 750 basis point improvement compared to FY24. Its non-GAAP EPS is expected to be in the range of $0.06 to $0.07 for FY25.

Valuation Analysis

Braze currently sells at a forward price-to-sales ratio of 7.73 and a forward EV/sales ratio of 8.05. Its TTM price-to-sales ratio, which is what I will be using in my peer analysis, is 8.66.

To ascertain whether Braze’s price-to-sales ratio is fair, it is worth also looking at its future revenue estimates and those of the peers in my set.

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Based on these consensus growth rate estimates, I think Braze is roughly fairly valued, especially when compared to Klaviyo. While it has a lower price-to-sales ratio than Adobe but much stronger growth rates, this is obviously due to the fact that Adobe has many decades of operating experience and profitability under its name to support such strong stock market sentiment. There is definitely risk here in Braze’s valuation, and it is possible that the ratio contacts further as its growth rates are also slowing down, as mentioned in my Q2 earnings analysis above. It is worth noting that its calendar 2025 estimate is based on the consensus of 17 analysts, while its higher calendar 2026 estimate is based on the consensus of only 7 analysts. Based on the data from my Q2 earnings analysis, I am certain that the company is going to face growth rate expansion inhibitions moving forward. As a result, I think while its price-to-sales ratio could indeed be considered fair right now, it is going to contract in the coming Fiscal years.

Braze has delivered revenue growth of 47.6% as a five-year average; however, it has achieved a lower 30.15% as a forward five-year average. Its current YoY revenue growth is 33.12%, and its current forward revenue growth is 25.35%. This reinforces why I expect the price-to-sales ratio to contract from here. In my opinion, we could see a price-to-sales ratio of 7.5 in 12 months based on the contraction in calendar 2024 annual revenue growth from 24% to 20% in calendar 2025. If the company meets the current FY26 (calendar 2025) revenue estimate of $701.85M, it could have a market cap of $5.26B in around 12 months’ time if the market prices this into the stock at a price-to-sales ratio of 7.5 a few months early. This would be a 17.4% growth from the current market cap of $4.48B. However, while this near-term alpha potential is significant, I am not convinced of the company’s long-term prospects. As a result of my long-term allocation approach, I consider its contracting operational and financial growth rates to be problematic and a trend that I do not see enough evidence at this time of reversing any time soon. Therefore, I believe that the alpha potential of this investment over five to 10 years is currently much less likely than in the near term.

Risk Analysis

Braze is one such company that is going to face significant resistance from cheaper AI algorithms that surface at this time, which can help with marketing scheduling and even marketing content production. As Braze is not an AI company but instead integrates AI, I believe it is vulnerable to novel competitors, which are likely to begin to surface soon and consolidate positions over the next couple of decades. I believe we are going to see a democratization of the pricing in creative services, with AI filling a large market need for especially cheap content production for SMBs and one-person businesses. I believe part of the service that some of these AI companies are going to provide is direct marketing management at a cheaper cost and with a more heavily automated process than current players like Braze and Klaviyo, and certainly a leaner model than the much bigger Salesforce and Adobe.

Furthermore, the macro situation in the United States, Braze’s core market, is currently vulnerable. I believe that with inflationary pressures and budgetary constraints, which are likely to manifest as a result of federal budget management, AI players and automated services are likely to have an extremely strong position in the market due to cost-effectiveness. This could also drive much-needed deflationary pressures to reduce the federal debt burden and strengthen the U.S. dollar. While Braze’s services are currently considered cheaper alternatives to major players like Salesforce and Adobe, the macro environment might prove that Braze is still too expensive for SMBs. Therefore, I think this is the most significant near-term headwind facing Braze over the next five to 10 years. I believe management should invest more heavily in AI for both content creation and higher levels of cheaper, automated marketing for clients. I believe a failure to do this is going to result in a continued decline in customer adoption rates, particularly for smaller businesses, which is arguably Braze’s core market; this is represented in my Q2 earnings analysis. Enterprise customers have more money, and while this is showing growth for Braze at the moment, the reality is most of this market is captured by larger players like Salesforce and Adobe.

Conclusion

In my opinion, Braze is a near-term Buy, but it is a long-term Hold at the current valuation, given its slowing growth rates, a tough macro environment, and fierce competition over enterprise customers from Salesforce and Adobe. I do see significant potential for 12-month price growth of around 17% based on my price-to-sales ratio analysis, but beyond this, I find alpha potential to be much less likely due to market challenges, including macro concerns in the U.S., which, I believe, could intensify. As a long-term investor, this is a company I would like to continue to monitor, but my rating as it stands is a Hold.