Braze, Inc. (BRZE): Navigating Moderating Retention with Profitable Growth and AI Innovation

Braze, Inc. (NASDAQ: BRZE), a leader in customer engagement technology, faces a critical crossroads as its dollar-based net retention rate (DBNR) has dipped to 109% in early 2025 from 117% a year earlier. Yet, investors should look beyond this moderation to uncover a compelling story of profitability improvements, strategic AI-driven initiatives, and geographic diversification that could position the company for sustainable long-term growth. Here's why Braze remains a compelling investment despite the retention headwinds.

Financial Resilience Amid Moderating Retention

Braze's recent earnings reveal a company transitioning from rapid top-line growth to a more disciplined profit-focused model. In Q1 FY2026, revenue rose 20% year-over-year to $162.1 million, while non-GAAP net income turned positive at $7 million, marking a stark improvement from a $6 million loss in the same period last year. .

The company's free cash flow surged to $23 million, up from $11 million a year earlier, signaling operational efficiency gains. A critical metric to watch is its non-GAAP operating margin, which expanded by over 900 basis points year-over-year to 14%, driven by cost optimization and a 69.3% gross margin. This financial discipline, combined with a strong balance sheet (current ratio of 1.98), provides a foundation for reinvesting in growth without sacrificing profitability.

Strategic Moves: AI as the Catalyst for Future Growth

Braze's acquisition of OfferFit in Q1 FY2026 for $325 million marks a pivotal move to integrate reinforcement learning into its platform. This technology, now being tested in Project Catalyst's private beta, aims to automate customer journey optimization, reducing manual campaign management. Early results are promising: one customer saw a 20% uplift in promotional campaign efficiency using the AI tool.

The OfferFit integration aligns with Braze's broader strategy to address enterprise demand for personalized engagement. New product launches, such as RCS messaging and Canvas context features, further bolster its cross-channel orchestration capabilities. These moves are critical as Braze seeks to retain customers in an era where 70% of consumers expect hyper-personalized interactions, per its recent customer report.

Geographic diversification is another growth lever. Non-U.S. revenue now accounts for 46% of total revenue, up from 44% a year earlier, with wins in APAC and EMEA markets. The hiring of Ed McDonald, former CRO at Salesforce's Marketing Cloud, in July 2025 underscores management's focus on scaling the go-to-market engine.

Customer Retention: Challenges and Mitigants

While the 109% trailing-12-month DBNR reflects moderation, two factors temper concerns. First, large customers (≥$500k ARR) remain sticky, with retention at 112% and contributing 62% of ARR. Second, Braze attributes part of the dip to seasonal factors like multiyear enterprise contract renewals in Q1. Executives have emphasized “preventative churn efforts” and expect further stabilization.

The risk, however, is that macroeconomic pressures—such as cautious enterprise spending in APAC—could prolong this moderation. Competitors like legacy marketing clouds (e.g., Adobe, Salesforce) and niche solutions also loom. Braze's response: double down on AI and vendor consolidation trends. As enterprises seek unified platforms over fragmented stacks, Braze's position as a “single source of truth” for customer data could solidify its moat.

Valuation and Investment Thesis

At $36.24 per share as of June 2025, Braze trades at a 33.5% discount to analysts' average one-year price target of $48.38. . While its revenue growth (22%) lags peers like SoundHound (151%), its profitability turnaround and AI differentiation suggest it's undervalued.

The OfferFit acquisition's potential—expected to contribute ~2% to FY2026 revenue—remains underappreciated by the market. Long-term, Braze's goal to return to 10–12% non-GAAP operating margins by FY2027 hinges on successfully integrating AI into its platform. If it can reverse retention trends and expand its AI use cases (e.g., beyond marketing to customer service or product recommendations), the stock could see a meaningful rerating.

Risks to Consider

• Regulatory Delays: The OfferFit deal faces regulatory scrutiny, which could delay synergies.
• Macroeconomic Softness: APAC revenue growth is vulnerable to trade tensions and budget cuts.
• Competitive Erosion: Legacy vendors may undercut Braze's pricing or innovate faster in AI.

Final Take

Braze's moderation in retention is a valid concern, but it's overshadowed by its profitability turnaround, geographic expansion, and AI-driven innovation. The stock's valuation offers a margin of safety, while its long-term growth thesis—rooted in enterprise demand for personalized engagement—is intact. For investors willing to look past short-term retention pressures, Braze presents a compelling opportunity to buy a leader in a $20B+ SaaS market at a discount. Hold for now, but consider accumulating on dips as AI integration gains traction.

However, historical data suggests caution with timing strategies tied to earnings reports. A backtest of buying BRZE on earnings announcement days and holding for 20 days from 2020 to 2025 revealed a challenging return profile: a -1.39% CAGR, a Sharpe ratio of -0.02, and a maximum drawdown of -1.39%. While the stock's long-term fundamentals remain strong, this highlights the importance of risk management when capitalizing on short-term events. Investors should prioritize broader trends like AI integration and retention stabilization over event-driven trades, as the latter may amplify volatility without consistent rewards.