Fortune Favors The Brazen

Hi everyone,

Hope you’re had a great week! Read on for this week’s spotlight:

Small Cap Pick: Braze (BRZE-US, $3.7B MCAP)

Is software about to come back from the dead?

Many proclaimed that “Software is Dead” after trying out ChatGPT for a while and thinking through the implications for the industry that has largely ruled the last couple decades in public markets.

Software stocks have languished on a year to date basis in the favour of hardware companies that are building the infrastructure layer for the coming AI wave.

The IGV (software index) is up only 4.6% YTD vs. the SMH (semiconductor index) up 29%.

Will software get left behind, or is there something the market may be missing?

This week’s pick is in the software category and could benefit as a new-comer to the public markets.

• Overview 👉 What Does Braze Do?

• Product Suite 👉 Customer Engagement Platform

• How Do They Make Money? 👉 Subscription + Usage

• By The Numbers 👉 Key Metrics

• Risks 👉 Potential Pitfalls

Overview 👉 What Does Braze Do?

Braze is a customer engagement platform that helps businesses manage and optimize their interactions with users across various digital channels. It provides tools to create personalized marketing campaigns, deliver targeted messaging, and engage customers via push notifications, email, SMS, in-app messages, and more. The platform uses real-time data to help companies understand customer behavior and deliver relevant, timely communications, improving customer retention and engagement.

Braze is often used by companies in industries like retail, media, entertainment, and financial services to improve customer experiences and drive growth. It also emphasizes integration with other tools and platforms to give companies a holistic view of their customer data.

Product Suite 👉 Customer Engagement Platform

Braze offers a suite of products designed to help businesses engage with customers across multiple channels. The platform enables messaging via push notifications, in-app messages, email, SMS, MMS, web messaging, content cards, and WhatsApp. Each channel is customizable, allowing businesses to deliver personalized, real-time messages based on user behavior and preferences.

At the core of Braze’s platform is Braze Canvas, a visual tool for designing and managing customer journeys across different channels. Canvas supports event-based triggers, allowing businesses to send messages in response to user actions. It also enables A/B testing and provides personalization options to ensure campaigns resonate with individual users. This is now further powered by Sage AI:

Braze uses real-time data and advanced personalization features to tailor customer experiences. Its SDK collects data from apps and websites, while Braze Currents streams this data to other platforms for analysis. User segmentation helps businesses create targeted campaigns, and dynamic content personalization ensures messages are relevant.

The platform also offers predictive analytics, enabling businesses to forecast user behavior, such as churn or engagement. These insights help marketers craft strategies to retain users or improve campaign performance through A/B testing and engagement scoring.

Lifecycle automation is a key focus of Braze, allowing marketers to map out and automate customer journeys. Real-time campaigns are triggered by user behavior, helping brands engage customers at crucial moments throughout their lifecycle, from onboarding to re-engagement.

Braze integrates with a wide range of tools, from data warehouses and CRM systems to customer support and analytics platforms. Its APIs allow seamless data transfer, and the platform's partnerships with other marketing tools make it a versatile choice for businesses seeking to centralize customer engagement efforts.

Braze’s architecture is designed for real-time data ingestion and processing, allowing brands to react to user actions instantly. The platform also emphasizes security and compliance, ensuring businesses can meet regulations like GDPR and CCPA while delivering personalized customer experiences at scale.

How Do They Make Money? 👉 Subscription + Usage

Braze’s revenue strategy is centered on helping businesses grow and scale their customer engagement efforts. By offering a tiered subscription model and usage-based pricing, Braze ensures that its revenue scales as customers grow. Professional services and partnerships further enhance the customer experience, fostering loyalty and maximizing the value of Braze’s platform over time. This combination of scalable pricing, high-volume usage, and customer retention allows Braze to build a sustainable revenue model based on long-term relationships.

Braze generates revenue primarily through a subscription-based business model, where companies pay to use its platform for customer engagement. The subscription fees depend on factors like the number of active users, messaging volume, and service level. Larger businesses often opt for customized plans with advanced features such as Braze Canvas and Currents, while smaller companies may choose more basic options. This tiered pricing aligns with Braze’s focus on scaling its services as its clients grow.

Another significant revenue stream comes from usage-based charges, which increase as companies send more messages or process more data through the platform. As businesses expand their marketing efforts across channels, exceeding their initial messaging volumes, they incur additional fees. This model helps Braze grow its revenue alongside the growth of its customers’ engagement efforts, making it directly tied to the value the platform provides.

Braze also offers professional services, including onboarding, training, and custom support, which generate additional revenue. These services are especially beneficial for larger enterprises needing help with platform integration or advanced campaign strategies. While not as consistent as subscription revenue, these services play a crucial role in ensuring customer success and long-term retention.

Partnerships and integrations with other platforms, like customer data platforms (CDPs), database warehouse management, and CRM systems, add indirect value by expanding Braze’s capabilities. These collaborations help attract more users by making the platform more versatile and easier to integrate with existing business systems.

Lastly, customer retention and expansion are key to Braze’s long-term growth. As companies experience success with the platform, they often increase their usage, whether through adding new channels, expanding into new markets, or increasing messaging volume. This results in higher subscription and usage-based fees, aligning Braze’s revenue model with the ongoing growth and success of its customers.

By The Numbers 👉 Key Metrics

Recently, Braze reported their Q2FY25 results in which the stock sold off 17%. To me, this represents an excellent buying opportunity, as the market overreacted to a slightly soft quarter.

Highlights for the quarter:

A critical growth metric for Braze as they continue to both acquire and upsell customers is customer count. We saw healthy growth metrics continue over the quarter:

However, dollar-based net retention (DBNRR) showed signs of slowing, which raised investor concern. DBNR measures the revenue growth from existing customers, factoring in upsells, downsells, and churn, to show how much more or less those customers are spending compared to a previous period. While the drop to 114% is an area of concern, anything above 110% is seen as solid in the software space, especially given recent macro environment weakness.

An important area to watch for Braze is its profitability inflection point. After spending heavily on their go-to-market strategy over the last several years, Braze is now seeing operating leverage that will drop free cash flow down to the bottom line. This allows the company to become much more self-sufficient and pursue additional growth avenues organically.

From a valuation perspective, Braze trades at a very reasonable 5.2x Blended forward EV/Revenue while comparable companies trade at higher multiples Monday (9.5x), Hubspot (8.6x), and Klaviyo (6.7x).

Risks 👉 Potential Pitfalls

Reduced marketing spend due to macroeconomic conditions: Economic downturns may lead businesses to cut marketing budgets, reducing demand for Braze's platform and impacting subscription and usage-based revenues.

Gross margin erosion due to mix shift: A shift toward smaller or less profitable customers, or increased reliance on lower-margin services, could lead to declining gross margins and reduced profitability.

Normalization of Monthly Active Users (MAUs): Slower MAU growth could limit Braze’s revenue expansion, especially as engagement levels stabilize in mature markets.

Intensification of the competitive landscape: Increased competition from rivals like Salesforce and Adobe could lead to pricing pressure, higher customer acquisition costs, or client losses.

TAM limited to sophisticated customers: If Braze’s platform becomes too complex for smaller or less advanced businesses, its potential customer base could narrow, limiting growth opportunities.

Wrapping Up…

Braze looks like a growing company in an unloved area.

In a period of lowering rates, it is frequently the companies currently at a profitability inflection point that stand to benefit the most from this transition.

I love an underdog story, and at this level, Braze has lots to prove, but much to gain.

Cheers,

GRIT ALPHA Team

For those looking for daily news updates every morning, consider subscribing to our FREE daily newsletter, the GRIT Flagship! Daily news and insights on stocks, crypto, and finance. 📩

Cheers,

The GRIT Alpha Team

Grit is a publisher of financial information, not an investment advisor. Grit does not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient. Grit does not guarantee the accuracy or completeness of the information provided in this page. All statements and expressions herein are the sole opinion of the author or paid advertiser.

The author of this newsletter owns a position in Braze, Adobe, Zscaler, MongoDB, ServiceNow, Workday, and Snowflake in their portfolio or in the funds they manage. There is no guarantee that the author will maintain such a position in the future.

THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN. INVESTORS SHOULD OBTAIN INDIVIDUAL INVESTMENT ADVICE BASED ON THEIR OWN CIRCUMSTANCES BEFORE MAKING AN INVESTMENT DECISION

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

The author, publisher or insiders of the publisher may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable. They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and Grit undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.

Grit does not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.

By using the Site or any related social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.

Grit publishes content through Beehiiv, an email newsletter platform and operates the websites Gritcap.io and Get-versed.io and and social media accounts (including but not limited to): Instagram, Twitter, Linkedin, TikTok, YouTube, SnapChat, Facebook and Threads. By accessing Grit’s content, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof or any of Grit’s content. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website or Grit constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Grit is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Grit does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the "Securities Act") are available to U.S. investors ONLY who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Grit does not verify the adequacy, accuracy or completeness of any information. Neither Grit nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Grit nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis.

Please read: Terms of Use, Privacy Policy, Disclosure Policy, State Disclosure Policy, and Disclaimer Policy

If you have any questions please contact us at [email protected]