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Confluent Inc Cl A(CFLT-Q)
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1 Unstoppable Stock Down 81% to Buy Hand Over Fist, According to Wall Street

Motley Fool - Tue Nov 14, 2023

According to the International Data Corporation, 90% of the world's 1,000 largest companies will use data streaming by 2025. Confluent (NASDAQ: CFLT) is a leader in the industry, and it believes its opportunity is worth $60 billion right now -- considering the company is valued at just $5.4 billion, that implies a long runway for growth.

Data streaming is a relatively new technology born from the cloud computing revolution, but every investor should understand it. Don't worry, I'll explain how it works in a moment.

One thing is clear: Wall Street is very bullish on the opportunity. The Wall Street Journal tracks 27 analysts covering Confluent stock, and the majority have given it the highest-possible buy rating. Not a single one recommends selling. Given the stock trades 81% below its all-time high, here's why now might be the time for investors to follow Wall Street's lead.

Data streaming is becoming a critical technology

Once upon a time, people would have to buy a physical disc if they wanted to listen to music. The disc would be played on a stereo or portable CD player, and it was typically limited to around 20 songs. The dawn of streaming changed everything. Today, tech giants like Apple and Spotify store millions of songs in data centers, and their users can access every single one of them on demand via their smartphone device.

Think of data streaming in the same way. Businesses have always collected data on their customers, but they used to store it on-premise using physical servers and analyze it at a later date. But now, businesses rent that computing capacity from centralized data centers managed by tech companies like Microsoft and Amazon.

It's a practice called cloud computing, and it enables enterprises to run their entire operations online. That means data can be collected in real time, and data streaming technology allows businesses to process it, analyze it, and learn from it instantly. Imagine having the ability to immediately pivot marketing campaigns that aren't working, or to give customers a real-time look at product inventory levels -- with data streaming, those things are possible.

Retail giant Walmart uses Confluent's technology to monitor inventory across all of its physical and online sales channels. That way, the company instantly knows if a specific product is about to run out of stock, so it can be replenished before the shelves run bare. It ensures customers always find what they're looking for when they enter any Walmart location.

Even sports betting platforms use it to power their live in-game markets. A bookmaker has to calculate odds, feed them to the customer, and accept wagers within a matter of seconds, before the in-game momentum shifts.

A person walking through a factory between two digitally-enhanced shelves.

Image source: Getty Images.

Confluent disappointed investors in the third quarter, but that created an opportunity

Confluent just reported its financial results for the third quarter of 2023 (ended Sept. 30). It delivered $200.2 million in revenue, which was a 32% increase compared to the year-ago period, and it was also comfortably above the company's $194.5 million forecast.

But investors were disappointed because Confluent reduced its full-year revenue forecast for 2023 by $3 million, to $769 million (at the high end of the range). The company cited three very specific reasons:

  1. Two of its top customers were slowing their consumption on the Confluent platform. One was moving to its own data center, whereas the other was preparing to be acquired, which is a unique circumstance.
  2. The conflict in the Middle East added uncertainty to Confluent's outlook because Israel is a top-10 source of revenue for the company.
  3. A looming U.S. government shutdown also clouded Confluent's forecast because it serves many Federal agencies as well as state and local governments.

None of the above points are expected to impact the company over the long term, yet investors sent Confluent stock 43% lower immediately following the news. That's an opportunity for investors, especially because Q3 was the company's first-ever profitable quarter on a non-GAAP basis.

It generated $6.3 million in non-GAAP net income, which was a huge positive swing from the $38 million net loss it delivered in the year-ago quarter. It's an important milestone because it proves Confluent can beat growth expectations (as it did in Q3) while still carefully managing costs. Once the above-mentioned headwinds subside, there's no reason to think the company can't return to this trend.

Wall Street is very bullish on Confluent stock

As I touched on at the top, The Wall Street Journal tracks 27 analysts covering Confluent stock. And 17 of them have given it the highest-possible buy rating, with one in the overweight (bullish) camp, and eight recommending holding. One analyst is in the underweight (bearish) camp, but none recommend selling.

They have an average price target of $25.56, which represents 44% upside from where Confluent stock trades today. The most bullish analyst of the bunch, however, is betting it could soar 126% to $40.

But considering Confluent stock is trading 81% below its all-time high set during the tech frenzy of 2021, it would have to soar 530% to reclaim that level. I'm not suggesting it will get there anytime soon, but the business is in a significantly better position than it was two years ago.

For that reason, there will likely be upside to Confluent stock over the long term, so investors might want to follow Wall Street's lead and buy in.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Confluent, Microsoft, Spotify Technology, and Walmart. The Motley Fool has a disclosure policy.

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