Data is the lifeblood of modern businesses, and the ability to process and analyze it in real time can give companies a competitive edge in the digital economy. But traditional data platforms are often not designed to manage the large amounts produced by sources like social media, mobile devices, sensors, and online transactions.
That's where Confluent(NASDAQ: CFLT) comes in. The company is a leading provider of a data streaming platform that enables companies to analyze this kind of data in real time. Even though the company's performance in 2022 was disappointing, here's why the stock is a great investment opportunity in 2023 and beyond.
Why the company is valuable
Management's original vision was to create a new category of infrastructure that enables businesses to access, manage, and analyze data as it is generated and flows across different sources and destinations. It believes this new infrastructure is the key for companies to develop a competitive advantage in the digital economy.
Most people today consider the company a trailblazer in this new category of data infrastructure. Its team of CEO Jay Kreps, former Chief Technology Officer Neha Narkhede, and Jun Rao (all of them co-founders of the company) invented Kafka, an open-source distributed streaming platform.
And Confluent became the first company to commercialize Kafka for data streaming. It created paid advanced features atop the open-source version to help customers speed up their time to deploy this new data architecture with much fewer snarls than many companies could do independently.
These paid features help customers reduce costs, increase efficiency, improve revenue growth, accelerate innovation, and achieve objectives faster -- crucial when companies need to defend against emerging disruptors or disrupt established industries themselves.
Thousands of customers across various industries, such as retail, banking, healthcare, media, gaming, and transportation, have adopted its platform. Some notable customers include Domino's Pizza, Instacart, Intel, Expedia Group, BMW Group, BigCommerce, and Euronext.
These customers use the platform to power their core business processes, such as online shopping, video streaming, food delivery, travel booking, cybersecurity, financial transactions, and more.
There are a few risks
Competition is a considerable risk for Confluent. Established and emerging players offering similar or alternative solutions to the company's platform include Amazon's cloud unit Amazon Web Services (AWS), Microsoft's Azure, Cloudera, Alphabet's Google Cloud, IBM, TIBCO Software, Oracle, and the Apache Software Foundation.
These competitors might have more resources, greater brand recognition, a bigger customer base, or a wider geographic presence. And some offer lower prices, better features, or faster innovation. Therefore, Confluent needs to constantly invest in research and development, marketing, sales, and customer service to maintain its competitive edge and differentiation in the market.
In addition to stiff competition, Confluent is an early-stage company that has yet to produce a profit or positive free cash flow since its initial public offering (IPO). Unfortunately, it went public in the middle of 2021, the beginning of an uncertain economy due to rising inflation, as investors became less enthused with companies hemorrhaging cash.
As a result, the stock still traded 8% below its $36 IPO price at the end of last month. Yet despite its stock going nowhere over the last two years, it trades at a price-to-sales (P/S) ratio of 14.2, above the software industry's average P/S of 8.9. Some believe the market overvalues the stock, and any operational issues could cause a significant price decline.
It has solid competitive advantages
On the positive side, intense competition signals high demand and opportunity for data streaming solutions in the digital economy. Confluent has unique advantages that can help it stand out from its competitors and capture this opportunity. It differentiates itself from its larger cloud competitors like AWS, Google Cloud, and Azure in a few key ways:
- A focus on streaming data: Confluent concentrates solely on streaming data, whereas AWS, Google Cloud, and Azure offer a broader range of services. This specialization allows it to provide a more complete offering for streaming data.
- An open-source platform: Confluent believes in open-source technology. It applied that to Kafka to build trust, attract more developers and users, and get feedback from the community to improve the quality and functionality of its platform.
- Its partner ecosystem: It has a robust partner ecosystem that provides various solutions and services for Kafka. This network allows the company to reach a much larger audience.
- Continuous innovation: Confluent continuously adds new features and capabilities to its platform to stay ahead of the competition and meet customer needs.
These competitive advantages have helped it maintain leadership in the streaming market by offering a superior and reliable data streaming solution to meet the needs of modern businesses.
An excellent investment for 2023 and beyond
Despite worries about headwinds from an uncertain economy and an analyst downgrade of the stock in the early summer, the company surprised investors with an excellent second-quarter 2023 earnings report that showed strong growth and improvement in several key metrics, such as revenue, cloud revenue, remaining performance obligations, and operating margin.
It also has improved bottom-line profitability faster than many expect. The company reported zero adjusted earnings per share (EPS), beating analysts' estimates of a $0.06 EPS loss.
The stock price surged over 16% the day after the company released the second-quarter report. Investors recognize these results indicate that Confluent is a leader in the data streaming market, which the company estimates is worth $60 billion.
The future looks bright for the company and its investors. With its impressive potential and commitment to customer satisfaction, it stands out as a top choice in the tech industry. If you're seeking a potentially lucrative opportunity, it's time to start researching this company.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rob Starks Jr has positions in Alphabet and Amazon.com. The Motley Fool has positions in and recommends Alphabet, Amazon.com, BigCommerce, Confluent, Domino's Pizza, Microsoft, and Oracle. The Motley Fool recommends Bayerische Motoren Werke Aktiengesellschaft, Intel, and International Business Machines and recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.