Is Confluent Stock A Buy?

Data-as-a Service is growing. The industry was sized at around $5 billion in 2018 and researchers expect that to grow to over $61 billion by 2026. That’s certainly some growth to pay attention to, so who are the players in this data-as-a-service game? 

Software has forever changed how companies conduct business and engage with consumers. But software itself has changed from mere applications that companies use to the very glue that holds business processes together – a literal reimagining of business, from front-end interactions to back-end processes.

And it’s happening in all types of businesses, everywhere around the world, and in almost every industry.

It’s this very change in software’s role that’s driven the change in the role data plays. Businesses have always gathered data but in the past it was simply stored somewhere in a database – never really accessed until necessary. And this worked when each application that needed data operated separately and outside the business’s core processes.

Today, though, software apps must integrate and cohesively work together – to bring meaning to the loads of data collected in just one business day. This teamwork between software applications and the data they collect leads to real-time improvements in both business operations and processes and customer experiences.

So, picture these apps as a blindfolded team of baseball players out on the field and the data produced by the apps as the baseball itself. This is a rough approximation of data in motion. Confluent takes the blindfolds off your team.

What is Confluent?

Founded in 2014, Confluent (CFLT) is a big data, data-as-a-service company. The founding specialty is “data in motion”. This simply means data that’s traveling between two places, such as from phone to laptop, laptop to server, or phone to data repository, etc.

Traditionally, companies look at marketing numbers or sales figures from last month or last year to inform today’s decisions. Confluent’s aim is to harness the power of today’s real-time information and provide this capability to companies through the cloud.

Instead of observing and collecting massive amounts of data for viewing at some point in the future – data that’s old by tomorrow – Confluent acts as the brains within a business’s core stack. Even legacy systems project their “consciousness” through the platform, allowing data gathering in real-time. Key decision-makers can act on up-to-the-minute information.

It’s expected that demand for these types of insights will continue growing over the next 10 years or so. Companies not only want but need this type of vision into the hearts of their businesses. Data in motion can even help bolster innovation so companies can beat their competitors to the next big thing.

The founders of Confluent originally built the Apache Kafka program during their time at LinkedIn (delisted from the NYSE in 2016). Confluent harnesses in-motion data.

This new category of business intelligence is now mainstream. Walmart (WMT) uses data in motion to keep tabs on inventory. The Centers for Disease Control uses it to monitor real-time data at hospitals and testing sites around the nation.

And Confluent provides this service across industries for businesses of every size, such as cloud-natives Square (SQ), Grab (AGC), and more.

Confluent launched its IPO in June 2021 and raised $828 million selling for $36 per share. Analysts expected these initial shares to go for between $29 and $33 per share, but investors let their interest be known.

In 2020, Confluent’s valuation was around $4.5 billion – since listing, the company is now valued at $9 billion.

This is thanks in part to several additional features the company added to strengthen capabilities. For instance, Confluent now supports Azure’s Private Link, a private network allowing the use of Confluent, adding greater security and connectivity control. Plus, it strengthens the Microsoft Azure integration.

What About Confluent Earnings Since the IPO Debut?

This data in motion company has started its trading life on a high note, with strong results for Q2.

Revenue growth in Q2 sailed past 64% YOY, coming out at $88.3 million. Confluent Cloud’s revenues outpaced all other offerings’ growth with 200% YOY growth.

Reviewing growth from pre-IPO, this is a significant spike from a previous growth rate of 134%.

Subscription revenues come from Confluent and Confluent Cloud and account for up to 90% of total company revenues. The remaining percentage of revenue comes from services attached to subscriptions.

According to those on the earnings call, revenue components, billing terms, and performance obligations not yet delivered are vital to understanding Confluent’s business health.

Overall, this is good news – but is it enough to earn CFLT Buy rating status?

Is Confluent (CFLT) Stock A Buy?

Some analysts argue that over the long term, Confluent might not be as profitable as it looks. For instance, since 2014, Confluent has experienced losses. The company lost $95 million in 2019 and $229 million in 2020.

Recently, Confluent showed a $44.5-million quarterly loss on a $77-million revenue. That same quarter one year prior was only $33.6 million. But, in the company’s defense, that quarter’s revenue grew from $51 million to $77 million.

Another thing investors must consider when viewing these losses is that it costs a lot of money for tech companies to start up: operating costs, proprietary technology, and marketing all take a toll.

Rather than dallying over these losses in such an early stage of the company’s history, it’s more important to review growth of revenue – which Confluent certainly has. YOY, revenue grew 57% in 2020 and another 51% in just the first half of 2021.

The need and demand for data in motion services can only grow in the coming years. Confluent is particularly important in this drive for both hybrid and multiple-cloud architectures, and is evidenced by the growing and ongoing relationships the company has with all of the major cloud providers.

In fact, in August 2021, Google named Confluent a Partner of the Year. That’s three years in a row Google’s given the honor. Confluent cites a recognition of their leadership, smart analytics, commitment to customer success, and innovative delivery of solutions that matter as Google’s reasons for the accolade.

Confluent succeeds in the industry because the company is cloud-first and cloud-native, offers a complete solution, and can integrate anywhere, anytime. The company is a leader in a still-growing space.

The growth potential is definitely there. As investment decisions go, Confluent could pay off big time in the years to come, even if it’s valuation looks lofty here.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.