Up More Than 100% From Its Recent IPO, Is This Cloud Stock a Buy?

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Since its initial public offering (IPO) at $16 per share on Nov. 11, Backblaze (NASDAQ:BLZE) has already seen its stock price surge by more than 100%, and is currently trading around $31 a share. Apparently, the market appreciates the already large and still growing opportunities the cloud storage specialist is working to address.

Is there still time for investors to jump into that growth story? Let’s find out.

Simplified cloud storage capabilities

Backblaze has two products that leverage its cloud storage infrastructure. 

Image source: Getty Images.

Its backup solution allows users to back up an unlimited amount of data from their desktops and laptops to the cloud, sometimes referred to as data protection-as-a-service (DPaaS). Management anticipates the DPaaS market should grow at a compound annual growth rate (CAGR) of 19% through 2025 to reach $11 billion a year.

Its other product, B2 cloud storage, allows employees to store their files, develop applications, and collaborate, also known as infrastructure-as-a-service (IaaS). IaaS addresses a larger opportunity that should grow at a CAGR of 27% through 2025 to top $54 billion annually.

Of course, such attractive markets also involve a strong competitive environment that includes the larger cloud storage players such as Amazon Web Services (AWS) and Microsoft‘s Azure, among others. But Backblaze developed differentiated offerings thanks to its simplified structure and lower prices relative to competitors. Its self-service products also better suit individual users, as well as small- and medium-sized enterprises. As a result, the company managed to accumulate approximately 500,000 paying customers at the end of the last quarter.

Because of its low prices, Backblaze generated modest revenue of $31.5 million during the first half of 2021, up 24.7% year over year, boosted by the strong 60.3% growth of its IaaS offering to $10.1 million. Its larger DPaaS business grew only 12.2% year over year to $21.1 million.

The company has been investing in its infrastructure and offerings to support its growth and gain scale. As a result, operating leverage hasn’t materialized yet. Net losses increased to $6.1 million during the first half of this year, compared to a $1.3 million loss in the prior-year period.

Intensifying competition

With the surge in the stock price over the last several days, the company’s market cap sits at roughly $912 million, which corresponds to 16.7 times trailing-12-month sales.

At such a rich valuation, the market is already anticipating Backblaze will provide flawless execution over the next several years to match or exceed the growth of its markets while improving profitability. However, investors should realize the company remains exposed to intensifying competition, given the low barrier to entry simplified cloud storage capabilities represent. 

Here’s an illustration: In addition to the existing competition, the high-growth cloud delivery network specialist Cloudflare recently announced it has been developing a new cloud storage offering that should compete with Backblaze’s.

Indeed, Cloudflare’s new cloud storage solution will most likely address the company’s vast customer base of individuals and small businesses, which corresponds to Backblaze’s core customers.

More importantly, Cloudflare will be competing on price. For instance, Backblaze prices egress traffic (the network traffic you generate when you download a file) from its platform at an attractive 80% discount to AWS. But Cloudflare plans to offer egress traffic for free as it can leverage cross-selling opportunities between its cloud storage solution and its various other products.

When available at a date yet to be determined, Cloudflare’s disruptive cloud offering could lead giant cloud providers to cut their prices, which could reduce Backblaze’s ability to compete on prices and eventually generate higher margins.

That doesn’t mean Backblaze can’t thrive in its growing markets. But given the impressive and sudden increase in the company’s stock price amid intensifying competition, any upside potential now depends on flawless execution over the next several years. Thus, I prefer to wait for the stock price to cool off before considering investing in this cloud stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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