Hook / Thesis
Backblaze has stopped being only a low-cost backup play and is turning into a differentiated, low-cost data lake for AI workloads. Recent results and deal flow — including an announced $335M partnership for AI storage capacity — point to sustainable revenue upside. At the same time, management is reinvesting to capture AI customers, which will weigh on GAAP margins and earnings in the near term.
The trade here is straightforward: the market is willing to reward durable B2 Cloud Storage growth, but the sells-off that could follow margin surprises presents an opportunity to buy on weakness with a strict stop. I favor a long position sized for a medium/long-term swing aiming to capture re-rating as AI contracts convert to recurring revenue.
What Backblaze Does and Why the Market Should Care
Backblaze provides cloud storage and data protection services for businesses and consumers, with its B2 Cloud Storage product positioned as a low-cost data lake. The company is attractive to developers, media customers, and increasingly AI infrastructure partners because of its price-per-byte economics and focus on throughput and data durability. The recently publicized $335M partnership (CoreWeave) is a good example of how Backblaze is being selected as the storage layer for AI workloads that demand large, inexpensive object stores.
Why that matters: AI workloads are wildly data-intensive and scale-sensitive. If Backblaze can win a material share of AI storage budgets, growth can outpace legacy backup peers and support higher absolute margins over time as utilization improves. In short, Backblaze is trading up the value chain from backup/archiving to foundational AI data infrastructure.
Key Recent Results & Supporting Data
- The market cheered Q2 results: revenue of $42.7M and year-over-year growth of 18% with B2 Cloud Storage up 34% year-over-year. That combination of top-line beat and accelerating B2 growth is the central fundamental driver behind the stock’s re-rating.
- Earlier in the year the company reported a strong commercial inflection: a 76% year-over-year increase in AI customers and reported adjusted EBITDA margins as high as 26% in some disclosures, with management projecting positive adjusted free cash flow in the second half of 2026.
- Market snapshot: Backblaze trades at roughly a $792M market capitalization with enterprise value near $809M. Valuation multiples include price-to-sales around 5.08 and price-to-book near 8.98. GAAP earnings remain negative (EPS about -$0.33), and return on equity and assets are still negative (-23% ROE; -9.1% ROA).
- Technicals and sentiment: the shares have pulled back from a 52-week high of $23.99 to a recent price of $12.80, with an RSI near 38 suggesting the pullback has momentum but not extreme capitulation. Short interest has risen at times — a potential volatility amplifier — but days-to-cover figures remain low (around 1-1.4 days in recent settlements).
Valuation Framing
At roughly $792M market cap and EV of $809M, the market is pricing in a healthy growth profile for Backblaze. Price-to-sales of ~5x is elevated relative to older, lower-growth storage incumbents but not outlandish for a company that is proving it can win AI workloads and expand B2 revenue. Two important qualifiers:
- Multiples assume successful monetization of AI storage deals into recurring revenue. If the CoreWeave-style contracts are one-off or heavily discounted pilot deals, multiples will look stretched.
- Profitability matters. Management’s talk of delivering positive adjusted free cash flow in H2 2026 is the valuation hinge: if they can show sustained cash generation while keeping B2 growth north of mid-teens, the current multiple is defendable.
Catalysts to Watch (2-5)
- Conversion of the CoreWeave partnership to recurring billings and publicized usage metrics (storage TBs consumed, ARR contribution).
- Quarterly B2 revenue growth above mid-teens to high-teens; continued outperformance vs. total company revenue.
- Management proof points on margins: sustained adjusted EBITDA expansion or positive adjusted free cash flow in upcoming quarters.
- Enterprise sales ramp under new commercial leadership that pushes larger, multi-year contracts.
- Product or pricing announcements that capture higher-margin usage (e.g., tiering, premium throughput features for AI customers).
Trade Plan (Actionable)
Direction: Long
Entry Price: $12.80 (current price)
Target Price: $20.00
Stop Loss: $9.75
Horizon: long term (180 trading days). I expect this trade to play out over roughly six months because enterprise AI storage contracts take time to ramp and quarterly reporting is the main cadence for fresh evidence. If the company hits its growth and cash-flow inflection milestones, the market should re-rate multiples; that process typically unfolds over multiple quarters.
Why these levels: Entry at $12.80 reflects the current market price. The stop at $9.75 is set below the recent consolidation zone and provides room for normal volatility while cutting losses if the top-line momentum stalls materially. The $20.00 target captures a meaningful re-rating toward prior multi-month highs while leaving room for further upside if results exceed expectations.
Position sizing: keep this as a catalyst-driven swing trade. Given elevated single-stock volatility and legal/regulatory overhangs in the past, size the position to no more than a mid-single-digit percentage of a diversified portfolio unless you have high conviction and can tolerate a larger drawdown.
Risks and Counterarguments
Below are the primary downside scenarios that could defeat this thesis, followed by a brief counterargument to the bullish view.
- Margin compression from AI pricing - Winning AI customers often requires steep discounts, generous ingress allowances, or upfront capacity commitments. A win that burns gross margin could pressure GAAP profits and push out the cash-flow inflection.
- Concentration and contract risk - Large partnerships like the $335M CoreWeave deal are positive for growth but create concentration risk. If a single large customer slows or renegotiates, revenue volatility will spike.
- Competitive pressure from hyperscalers - AWS, Google, and Microsoft can underprice or bundle storage with compute for their AI customers, making it harder for Backblaze to defend pricing or capture broad share.
- Legal/regulatory overhangs and reputational risk - Prior investor lawsuits and allegations can depress the multiple and distract management even if the business fundamentals are improving.
- Execution risk on enterprise sales - Moving from developer and SMB usage to large enterprise contracts requires a different sales motion and longer sales cycles. Misses here can delay scalable revenue growth.
Counterargument: It’s reasonable to argue that revenue growth tied to AI is hype-driven and could be lumpy. If the CoreWeave deal is more of a marketing tie-up than a steady revenue stream, the company could struggle to translate headline wins into predictable ARR. In that case, multiples above 5x sales would look unsupportable and the stock would likely retrace to lower levels.
Why I’m Still Comfortable Buying Here
Even accounting for these risks, the facts that matter are (1) accelerating B2 revenue growth (34% year-over-year in the quarter cited), (2) concrete large-scale partnerships that validate product-market fit for AI workloads, and (3) management’s public target of positive adjusted free cash flow in H2 2026. That combination argues for asymmetric upside from current levels, provided the company shows continued execution on margins and customer ramps.
What Would Change My Mind
- Negative: A failed or renegotiated CoreWeave contract, a meaningful slowdown in B2 growth (two quarters below mid-teens growth), or new evidence that AI customers are highly loss-making would force me to exit or tighten stops.
- Positive: Demonstrable margin recovery, consistent beat-and-raise quarters on revenue and adjusted free cash flow, or a string of new enterprise deals that materially diversify revenue would prompt me to add to the position and move the stop higher.
Conclusion
Backblaze sits at an important inflection: AI demand gives the company a path to faster, stickier revenue, but the road to profitable scale requires discipline on pricing and efficient customer acquisition. The proposed trade seeks to capture the asymmetric upside if the company converts AI partnerships into recurring billings, while limiting downside through a defined stop. For traders who believe AI storage is a secular tailwind and who can tolerate headline-driven volatility, this is a risk-adjusted long with a clear contingency plan.
Important near-term checkpoints: 10/31/2026 quarterly results (B2 growth rate, CoreWeave billings), any updated guide for adjusted free cash flow, and gross margin trajectory over the next two quarters.