1 Cloud Stock That Still Has a Long Runway

The cloud computing concept has changed the way companies function. Most notably the approach cuts massive costs that come from building and maintaining physical data centers.

The various cloud platforms have simplified and streamlined data storage, but there can still be struggles with making that data accessible to everyone in an organization in real-time.

Enter event streaming technology, whose main goal is to gather data from multiple sources and allow a wide berth of people in a business to tap into it as it happens. The industry standard has become Apache Kafka, an open-source event streaming platform that’s currently the software of choice for 80% of Fortune 100 companies.

Kafka’s market dominance is something that Confluent (NYSE: CFLT) hopes to capitalize on. The company was founded in 2014 by the creators of Kafka, with the mission of providing a platform that will maximize and manage the open-source software to the fullest.

The emergence of Confluent’s platform was highly anticipated. After the company’s IPO at $36 per share in the summer of 2021, the stock more than doubled by the fall of that year, reaching a peak over $93. But as 2022 took the wind out of technology companies’ sails, CFLT dropped down to around $20. After a shortly-lived rally in early 2023, the stock has now slid even further.

So is Confluent stock undervalued?

Why Did Confluent Stock Go Down?

The sharp decline in early November was due to disappointment about the company’s overall revenue guidance. In the 3rd quarter of 2023, Confluent reported revenue just topping $200 million, which was 32% above last year’s $151.7 million. It also beat analysts’ estimates for the quarter by 2.5%.

In and of itself, that’s no reason for the stock to plummet so drastically. But despite the year-over-year increase, Confluent lowered revenue expectations for 2023 year by 3%. Conflict in Israel and changes in usage from some of the company’s top partners were noted as reasons for the decline.

Concerns about a government shutdown were also cited because many customers originate from state and federal governments. Even though the company’s near-term guidance was reduced, none of the issues would seem to affect Confluent in the long run.

Though lowered expectations won’t excite investors, there were still plenty of positives emanating from the earnings release. Confluent currently has 1185 customers that spend $100,000 or more in Annual Recurring Revenue (ARR) which is a 25% increase over last year.

Plus, subscription revenue as a whole accounted for $189 million of the company’s $200 million in revenue, and it increased by 36% year-over-year.

What Do Analysts Say About Confluent?

Those positives, along with the steep sell-off, are why analysts are largely bullish on CFLT at this price point when evaluating the upside relative to the risk.

Of the 27 analysts who have issued opinions on the stock, there is a lone Sell rating. That bearish rating forecasts Confluent will fall by 1.9% to $19 per share over the next 12 months.

There are 17 analysts who disagree with that assessment, including one analyst who believes CFLT is set to outperform the market over the next year. That analyst sees the stock shooting up by over 91% to $37 per share.

9 Hold ratings exist and the consensus among all CFLT forecasts is for the share price to rise by 24% to $24 per share over the next year.

Is Confluent Stock Undervalued?

According to a discounted cash flow forecast analysis, Confluent is undervalued by 9.9% to fair value of $20.58. Based on analysts consensus, Confluent is undervalued by 23.8% to fair value of $24.22 per share.

The upside is higher now following the recent selloff after earnings disappointed. But there was a positive factor in that report, which was Confluent is trending toward profitability. The company realized its first non-GAAP positive earnings per share of $0.02.

Confluent now has a price-to-sales (P/S) ratio of around 8x. That, coupled with improving financials and a growing subscriber base support the bullish investment thesis.

Will Confluent Stock Recover?

The headwinds Confluent faces appear to be short-term in nature. The future appears bright with the company beefing up its product line (and hopefully its revenue) with the introduction of Apache Flink.

Flink is a serverless platform that fully integrates with Kafka and can process massive amounts of data in seconds and it’s increasingly being used by top tier technology and financial giants.

For example, Alibaba has used the software to keep its search rankings up to date, and the company reported that Flink can handle 1.7 billion messages per second and Capital One used the platform to optimize activity monitoring for its banking customers.

That amount of data Flink can handle makes it an ideal platform to maximize the benefits of AI too. While Confluent is up against temporal struggles, the future looks more rosy than the share price may indicate. 

Kafka adoption is wide-reaching and across many sectors. Still, the company’s market opportunity is large and the company estimates it at $60 billion. Currently Confluent has a market cap of $5.84 billion.

Confluent Stock: Buy or Sell?

Confluent has tremendous opportunity for growth, and the company has continued to expand its product line. It brought in revenue that was nearly a third more than the year prior. Not to mention it is approaching profitability and seems to be inexpensively valued after the steep selloff.

There is little doubt that cloud computing is the future, and perhaps the primary question is whether Confluent’s platform can entice enough customers away from managing Kafka themselves.

Given the complexity and the amount of data that many businesses will require, and the potential to fuel AI, there are still reasons to get excited about Confluent stock.

As a result, the rapid share price decline makes the firm look more like a buying opportunity for patient investors.

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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.