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Confluent Inc Cl A(CFLT-Q)

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1 Unstoppable Stock Down 61% to Buy Hand Over Fist, According to Wall Street

Motley Fool - Sat Aug 5, 2023

The U.S. corporate world is currently in the middle of an important reporting season for the quarter ended June 30. Given the tough economic climate with elevated inflation and rising interest rates, investors are watching companies' performance closely to see how they're navigating the challenge.

Confluent (NASDAQ: CFLT) is a leading data streaming platform which reported its second-quarter results on Aug. 2. They beat the company's own guidance, much to the delight of investors, who sent Confluent stock surging 9% higher immediately after the release.

But beating expectations is a habit for this company, and Wall Street has noticed. The Wall Street Journal tracks 25 analysts covering Confluent stock, and they're overwhelmingly bullish on its prospects. In fact, not a single analyst recommends selling. Here's why.

A person standing in front of digitally enhanced shelving in a large factory.

Image source: Getty Images.

Data streaming is becoming a necessity for all companies

Data streaming sounds complicated, but it's an important concept for investors to understand. According to the International Data Corporation, 90% of the world's 1,000 largest companies will be using the technology by 2025.

Here's a good analogy that might help. If you wanted to watch a movie at home 10 years ago, you might've purchased a DVD on which it was stored. You'd insert the disc into your DVD player, and the movie would start. Today, you probably subscribe to streaming providers like Netflix, which store movies in their data centers so you can play them on demand on your TV, no disc or additional hardware required.

Data streaming is a similar concept. Companies have always collected data on their customers and on their operations, but they used to store it on a physical server on site and analyze it at a later date. But thanks to data centers and cloud computing, they can now rent powerful infrastructure at a fraction of the cost. And thanks to data streaming platforms like Confluent, their data can be ingested by the data center, processed, and analyzed in real time.

It allows companies to draw immediate insights on customer behavior or operational processes, which helps save on costs and maximize revenue. Take retail giant Walmart, for example. It uses Confluent's data streaming platform to manage inventory in real time. It connects all its stores across the U.S. with its online sales channels, so each time a product is purchased through any means, inventory is updated live.

That means there's practically no reason (within Walmart's control) for a product to ever run out of stock, because Walmart knows exactly when to replenish it before the shelves run empty. That elevates the customer experience and ensures that people are always up to date on what's available, and at which locations.

Confluent delivered another blockbuster quarter

Confluent generated $189.3 million in revenue during Q2, which beat its forecast of $183 million. It was the ninth consecutive quarter the company delivered revenue that was above its guidance, signaling demand is exceeding even its own expectations despite the tough economic climate right now. It prompted Confluent to increase its 2023 full-year revenue estimate by $7 million to $772 million.

Part of the strong result is attributable to the acquisition of new customers. Confluent had 4,830 businesses on board at the end of Q2, an increase of 17% year over year. But growth was even stronger among the company's top spending cohorts. It had 1,144 customers spending at least $100,000 per year, which was a 33% increase, and 147 customers spending at least $1 million per year, up 48%.

The other side of the equation is Confluent's strong net revenue retention rate. It came in at 130%, which implies existing customers were spending 30% more money in Q2 2023 than they were in Q2 2022. Retention was an even more impressive 140% among Confluent's cloud customers specifically. This is important because companies are increasingly reliant on the cloud to store their valuable data, so it's certainly the future of data streaming technology.

Data streaming is growing more valuable to customers over time. For example, a health benefits provider is using Confluent to accelerate claims processing and approval, and between 2018 and 2022, its spending on the platform increased by 10 times. Similarly, a payments provider increased its spending on Confluent by 34 times between 2017 and 2022.

Wall Street is overwhelmingly bullish on Confluent stock

Many technology companies are struggling to generate growth in this economic environment, and some are even slashing their forecasts. That places Confluent among a unique group of resilient businesses investors can rely on to perform during tough periods.

It's not surprising that Confluent stock jumped 9% immediately following the release of its Q2 results, but it's still down 61% from its all-time high. That presents an opportunity for investors to buy now, especially given that the company has a long runway for growth with an estimated addressable market worth $60 billion today.

The Wall Street Journal tracks 25 analysts covering Confluent stock. 15 of them have given it the highest possible buy rating, with one in the overweight (bullish) camp, and the remaining nine recommending holding. Not a single analyst recommends selling.

They have a consensus price target of $38.14 for the stock, which represents 8% upside from where it trades as of this writing. But one analyst firm -- Needham Securities -- thinks Confluent could jump 25% to $45 per share. If the company continues to beat expectations, I'd expect those price targets to rise over time.

Investors might want to follow the Street's lead and buy in at these prices.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Confluent, Netflix, and Walmart. The Motley Fool has a disclosure policy.

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