When Backblaze (NASDAQ:BLZE) went public last November, I thought it might be an interesting play, but I didn’t like the valuation or the earnings.
And I still don’t. And this concerns me because I’m a customer.
Backblaze generated $41m and $54m in 2019 and 2020 respectively. They were barely profitable in 2019 and had a small loss in 2020 – fair to say they’ve been right at break even during these periods. For 2021, sales rose to $67m and losses expanded, and now looking at TTM losses are larger still.
A lot of companies are “founded” (“cobbled together” is a more accurate) and their business model is “go public”. I’m not misspeaking – I mean their only plan is to go public and hopefully be acquired or at least cash out the original investors. The prospect of running and growing the business profitably is a distant consideration.
Backblaze is not your typical tech IPO. Backblaze has been in business 15 years ago with about $5m in cash. They have been growing slowly and I think they genuinely are trying to make a profitable go of it.
However, it appears to me that they’re either growing too slowly or the fundamental engine isn’t working. As they gain scale, they should be increasingly profitable, not making bigger and bigger losses. They’re not even profitable if you back out all the bad stuff (EBITDA). This is also after they made a price hike last fall, so they can’t raise prices again immediately.
About two-thirds of BLZE’s revenue is from their traditional computer backup, and about one-third is from B2. B2 is already seven years old but interesting to see how much it’s grown. Revenue from computer backup subscriptions was $12.3m last quarter. Some people are grandfathered in and haven’t moved to the new pricing yet, so let’s say $6.50/month ($19.50/quarter) is about what it costs. $12.3m divided by $19.50 means they have about 630,000 subscribers for that product.
BLZE went public at $16. Today it trades around $5. That makes them a $150m company by market cap.
So what’s the future for Backblaze? There are three possibilities and one likelihood.
They could become a tech titan: I don’t think this is likely given their slow growth and low base. They’re not going to explode to be a Google or a Microsoft – there just isn’t that kind of mass media. If they were adding 50% more subscribers every quarter this would be a different story. BTW, Backblaze doesn’t disclose its subscriber count.
They could go bankrupt: If this was a possibility, someone would buy them.
They could be bought: Will they stay independent? My guess is no, because they’re not chewing up market share left and right. By process of elimination, this is the only likely outcome.
If we continue with the 2/3s backup, 1/3 B2 analysis, then let’s divide 2/3rds of the market cap ($100m) by 630K, which gives us a customer value of $158. No idea what the B2 value is – probably more because those customers will use more. How much are 630,000 customers worth? For a tech company, $150ish isn’t a lot to pay for a new customers, particularly if you can sell them additional services.
Since Backblaze isn’t a cash engine and isn’t likely to grow to the point where it becomes a tech titan on its own, it’ll be bought. What happens to customers? They’re usually a price hike and bit of account management nuisance, which I don’t look forward to.
I’m not predicting when or by whom. BLZE could continue to tread water for a long time before someone jumps on them.
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I also enjoy using LEBs! I have an empire of little guys for VPNs, larger guys for apps, and big guys for databases and storage. When I'm not in front a screen I'm into German Shepherd dogs, quality knives, target shooting, theology, tabletop roleplaying games, and forest hiking.
I enjoy writing technical articles here on LowEndBox to help people get more out of their systems. You can find me on LowEndTalk @raindog308
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They still have a lot of headroom to raise their prices on B2 and remain competitive for those with simple object storage backup as a use case, though. Last I checked, only Wasabi comes close to their current pricing. Of course, that could make them more attractive as an acquisition target as well as giving them a path to modest profitability.
Disclosure: I own a whopping 10 shares of BLZE. ;)
Sort of a lottery ticket now with those 10 shares, I wish you luck.
If you think that’s bad, you should see my Coinbase stock. 😆
The entire no profit/low profit tech cohort has gotten crushed. Considering the higher interest rate cycle is likely to last for a few years (counted from the time of first increase to first decrease) the outlook is not promising for loss making entities. My sense is there is more pain to come for this group.
Just look at ARKK.
Thanks for the warning! I was considering signing up for Blazeback so I would have an off-site backup for a price I am comfortable paying, after reading some of their employees write about their commitment to long term sustainability of their service. But if I uploaded several TB and then the price increased *again* because of a buyout I would want to not only drop my service but also smash all my hard drives and jump into the river in despair after all that time and effort. Knowing that Blazeback is a much higher risk than I thought, thanks to this article, I can avoid that dangerous path.
Eh. Seems like an overreaction to me. If you’re talking about their desktop backup product, that runs very nicely in the background without bogging down your system. Unless you’re paying for GB for your uploads or something, it’s really not a big investment. As for B2, it’s easy enough to transfer from there to any other object storage service if you want to make a change down the road.
Personally, I have *two* offsite backups of anything important, anyway. There’s some risk with any vendor.
For the curious, [here’s the Q2 2022 Earning Call](https://edge.media-server.com/mmc/p/zhf67wc9).