Braze (BRZE): A Hidden Gem in the Customer Engagement Platform Race

Braze (BRZE), a leading customer engagement platform (CEP), has quietly built a formidable position in the $100+ billion marketing tech market. Despite recent margin pressures and stock volatility, Braze's strong revenue growth, AI-driven innovation, and undervalued stock make it a compelling long-term investment. Let's dissect why this company could be a high-growth, margin-expanding winner in a crowded space.

The Growth Engine: Revenue, Customers, and AI

Braze's Q1 2025 results highlight explosive top-line momentum: $135.5 million in revenue, up 33% year-over-year, driven by subscription growth (34%) and a 12.6% increase in total customers to 2,102. High-value accounts (ARR ≥ $500K) surged 29% to 212, signaling a strategic shift toward enterprise clients—a critical lever for margin expansion.

But the real game-changer is Braze's AI partnership with Leonardo.ai, which injects predictive analytics into customer engagement workflows. This isn't just a buzzword: AI can boost retention, reduce churn, and optimize marketing spend—a trifecta that directly improves revenue and margins.

Margin Potential: Past Pressures vs. Future Gains

Critics will note Braze's recent margin declines: GAAP gross margin fell to 67.1% (from 67.9%), while non-GAAP operating losses widened to $10M. However, these pressures are largely investment-driven, not structural. R&D spending surged 43% YoY to fuel AI development and global expansion (e.g., new offices in Dubai, Seoul).

Here's why margins will rebound:
1. Scale Economies: With 2,102 customers, Braze can amortize fixed costs (e.g., data centers) across a larger base.
2. AI Efficiency: Automation reduces manual support costs, while upselling AI modules adds high-margin recurring revenue.
3. Geographic Leverage: APAC expansions (e.g., Indonesia data center) open markets with 40%+ CAGR in digital marketing spend.

Valuation: Undervalued on Growth and Innovation

Braze's valuation is a mystery given its growth profile. At a market cap of $2.8 billion, the stock trades at a P/S ratio of ~4.4x (based on $577M FY2025 revenue guidance), far below peers like Twilio (P/S 8x) and Adobe (P/S 11x). Even C3.ai (AI-focused CEP) trades at 6.3x sales—Braze is a relative steal.

The disconnect stems from near-term losses and retention headwinds. Yet, Braze's non-GAAP operating loss is narrowing (to $10M from $16M), and it projects FY2025 revenue growth of 17%+. With AI adoption accelerating, profitability could surprise to the upside.

Risks to Consider

• Retention Challenges: DBNRR dipped to 117% (from 122%), a red flag in SaaS. However, this may reflect a maturing customer base; Braze is addressing it with AI-driven solutions.
• Competitor Pressure: Adobe and Salesforce are integrating CEP into broader stacks, but Braze's AI focus and lower pricing could carve a niche.
• Margin Volatility: Continued R&D spending could delay breakeven, though free cash flow remains positive ($11.4M in Q1).

Investment Thesis: Buy the Dip, Play the Long Game

Braze is a deep-value SaaS play with asymmetric upside. The stock's 19% post-earnings drop (despite beating EPS estimates) reflects short-term margin jitters—but ignores the long-term AI-driven moat and global expansion.

Recommendation:
- Buy: Accumulate on dips below $25/share, with a $35+ target if FY2025 guidance is met.
- Hold: For investors with a 3+ year horizon, as AI adoption and margin improvements materialize.

Braze's combination of high growth, AI innovation, and undervalued stock positions it as a rare “buy” in a pricey tech landscape. The question isn't whether it can grow—it's whether the market will finally notice.