Confluent (NASDAQ: CFLT) is a leading developer of data streaming technologies that power many of our online experiences. Stock brokerage platforms use it to feed live pricing data directly to clients, and e-commerce websites use it to provide real-time inventory information to shoppers.
As more of our everyday lives migrate into the digital age, the demand for data streaming will only grow. Confluent just reported its financial results for the second quarter of 2024 (ended June 30), and the company's strong revenue growth reflected that trend.
Confluent stock is trading 79% below its all-time high, set during the tech frenzy in 2021. It was relatively overvalued back then, but the majority of analysts tracked by The Wall Street Journal have now assigned it the highest possible buy rating. Here's why investors might want to follow their lead.
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The data streaming opportunity is expanding
Apache Kafka is a widely used open-source data streaming platform created by Confluent's founders. It allows businesses to ingest, process, and analyze data in real time, helping them create live experiences for customers. Confluent was built to enhance Kafka's capabilities.
Confluent Cloud, for example, makes Kafka cloud-native , which eliminates the need for businesses to manage their own servers and infrastructure and makes the data streaming tool far more scalable.
Walmart uses Confluent to connect all its physical and online stores for real-time inventory management. It allows the retail giant to restock its shelves before they run bare, which is especially useful for its most popular products. That ensures customers always find what they need when they walk into any location.
Since data is the nectar of artificial intelligence (AI) models, Confluent is becoming an increasingly important tool in that emerging industry, too. AI applications must instantly ingest, analyze, and interpret user prompts to deliver accurate responses. Plus, the underlying model has to immediately absorb new data as it becomes available and react to it accurately.
As we know, Confluent's platform can facilitate real-time data ingestion, but it can also help developers build data pipelines capable of operating at scale while maintaining lightning-fast throughput. In fact, according to Confluent's 2024 data streaming report, which surveyed over 4,100 IT specialists, 90% of respondents said data streaming platforms will lead to more development and innovation in the AI industry .
Confluent's revenue is growing quickly, led by high-spending customers
Confluent generated $235 million in total revenue during Q2, a 24.1% increase from the year-ago period and above management's guidance of $229.5 million. That included 40% growth in Confluent Cloud revenue (for cloud-based customers), which now makes up half of the company's total revenue.
Two things contributed to Confluent's strong result. First, it had a net revenue retention rate of 118%, which meant existing customers were spending 18% more money compared to a year ago. Second, the company delivered strong growth in new customer acquisition.
At the end of Q2, Confluent had 5,440 total customers, which was a 13% increase. However, it had 1,306 customers spending at least $100,000 per year, representing 14% growth, and 177 customers spending at least $1 million per year, which was a 20% jump.
Confluent also improved its bottom line. The company managed its costs carefully during the quarter, increasing its overall operating expenses by just 11%. It still lost $89.9 million at the bottom line, but that was less than its $103.4 million net loss from the year-ago quarter.
On a non-GAAP (generally accepted accounting principles) basis, which strips out one-off and non-cash expenses, Confluent actually delivered a profit of $20.5 million, a solid improvement from its breakeven result a year ago.
Wall Street is bullish on Confluent stock
The Wall Street Journal tracks 33 analysts covering Confluent stock, and 20 of them have given it the highest possible buy rating. A further four analysts are in the overweight (bullish) camp, and eight recommend holding. Although one analyst has assigned Confluent stock an underweight (bearish) rating, none recommend outright selling.
The analysts have an average price target of $31.13, representing an upside of 57% from where the stock trades today.
In the Confluent survey I referenced earlier, 86% of respondents viewed data streaming as a strategic or important priority for IT investment this year. Plus, 84% of respondents said they have experienced twofold to 10-fold returns on their data streaming investments, so it's no surprise businesses are eager to put money behind the technology.
Overall, Confluent says the addressable market for data streaming is worth a whopping $60 billion right now, and based on the company's current revenue, it has barely scratched the surface of that opportunity.
When Confluent stock hit its all-time high in 2021, it was trading at a price-to-sales (P/S) ratio of almost 60, which was incredibly expensive and, quite frankly, unsustainable. Thanks to the decline in its stock price and the company's robust revenue growth since then, it now trades at a P/S ratio of just 7.1. That's near the cheapest level in Confluent's history as a public company.
For all the reasons I've highlighted, now might be a great time for investors to buy into the Confluent story.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Confluent and Walmart. The Motley Fool has a disclosure policy .
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