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Confluent Inc Cl A(CFLT-Q)

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A Few Years From Now, You'll Wish You'd Followed 2 of Wall Street's Top Billionaire Investors Into This Stock

Motley Fool - Wed Sep 13, 2023

Wall Street doesn't always get things right, but some investment professionals have an undeniable track record of success, so it's worth paying attention when they make a move.

Two prominent investment firms on the Street -- led by their billionaire founders -- continue to buy shares in revolutionary data streaming company Confluent (NASDAQ: CFLT).

  • Millennium Management is run by Israel (Izzy) Englander, and it manages $58 billion in assets around the world. It owns 2.4 million shares of Confluent worth $78 million, and interestingly, it bought over 97% of that position in the recent second quarter of 2023.
  • Tudor Investment Corporation has a track record of success spanning over four decades under the leadership of legendary founder Paul Tudor Jones. It was also an active buyer of Confluent in Q2, increasing its stake by 29% to over 547,000 shares, currently valued at $17 million.

Below, I'll explain why it's no surprise Wall Street titans are paying attention to this company -- and you'll be glad you did, too.

Data streaming: making life more convenient

Have you ever placed a bet on a live sporting match? Or, have you shopped online and benefited from real-time information about whether a product is in stock? Data streaming is the technology powering those experiences.

During a live game, a sports book needs to calculate the odds, feed them to the customer, and accept bets all within seconds. And for a retailer like Dick's Sporting Goods, presenting live inventory and promotional information in its online store can be the difference between customers making a purchase or clicking away to a competitor's website.

So, how does data streaming work? In the past, businesses would collect data on a physical server and come back to analyze it at a later date. But thanks to cloud computing, that data is now collected in a centralized data center and can be accessed online immediately. Confluent's data streaming technology enables businesses to process that data the moment it comes in, so they can make immediate adjustments to the customer experience.

But it's also extremely useful behind the scenes. Domino's Pizza has 17,000 stores worldwide, and it plugs Confluent into its digital sales, marketing, and operations channels. From there, it can make instant changes to its advertising strategies based on how customers are responding, and it can also feed live data to franchisees so they know exactly how each store is performing at any given moment.

Data streaming is going to be standard across nearly every organization in the world in the near future. The International Data Corporation estimates that 90% of the 1,000 largest companies globally will be using the technology by 2025, and thankfully for Izzy Englander and Paul Tudor Jones, Confluent is the undisputed industry leader.

Growing rapidly despite economic headwinds

The last 12 months have been challenging for the corporate sector. Elevated inflation and rising interest rates have forced consumers to tighten their belts, which is impacting the revenue of most businesses, which in-turn means they're spending less on software products.

Nevertheless, Confluent continues to experience strong demand for its data streaming platform, particularly among larger organizations, which is proof it's becoming critical. The below slide from its investor presentation for the second quarter of 2023 shows how it is acquiring high-spending customers (at a minimum of $1 million annually) at the fastest rate compared to other cohorts.

A slide showing the growth rates of Confluent's three primary customer cohorts.

Data source: Confluent.

Confluent also disclosed some select customer journeys to show how their spending on data streaming has rocketed higher over time. In fact, the company has a net revenue retention rate of 130%, which implies existing customers are spending 30% more money on the platform now compared to a year ago.

A slide showing that four Confluent customers have dramatically increased their spending on data streaming over the last few years.

Data source: Confluent.

A mix of strong customer acquisition and high revenue retention led Confluent to generate $189.3 million in Q2 revenue, which was well above its $183 million forecast. It prompted the company to lift its 2023 full-year revenue guidance by $7 million, to $772 million.

Why Confluent stock is a buy now

Confluent's data streaming technology is increasingly important to businesses, and the company says its addressable market is worth an estimated $60 billion. Considering Confluent's projected $772 million in 2023 revenue, it has barely scratched the surface of that opportunity.

Plus, Confluent is the best candidate to continue dominating the data streaming industry long into the future. Why? Because its platform is designed to enhance the capabilities of Apache Kafka, which is the open-source data streaming technology 80% of Fortune 100 companies use today -- and Confluent's founders built it!

Plus, Millennium Management and Tudor Investment Corporation aren't the only Confluent bulls on Wall Street. In fact, of the 26 analysts tracked by The Wall Street Journal, 16 have given the stock the highest-possible buy rating. One is in the overweight (bullish) camp, while nine recommend holding. Not one single analyst recommends selling.

When investors look back a few years from now, they might wish they had followed Wall Street's lead and bought Confluent stock.

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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 and Domino's Pizza. The Motley Fool has a disclosure policy.

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