Businesses are managing more and more data as part of everyday operations, and this is not expected to slow any time soon. Many of these businesses cannot handle the vast amounts of data they are receiving, so they employ databases to store it all.
While it's relatively easy to set up a database to securely store data, it's very difficult to spot key insights in that data until they are retrieved and analyzed, which can take time. And when that data needs to be analyzed and recognized in real-time, simply moving the data into databases isn't enough.
This is where Confluent (CFLT +0.02%) comes into play.
Image source: Getty Images.
Confluent provides a platform that enables customers to process data in real-time, spotting key bits of information that need to be acted on now. It's a solid business plan with real growth potential, but is the company executing well enough to warrant investment in its stock? Let's learn a bit more and see if we can find the answer.
Real-time data access
Confluent wants to "set data in motion" to process it in real-time. Confluent's services can be extremely important for a bank, for example. If the data comes across potential fraud, the bank wants to recognize it and take a closer look now, not store it away until it can be analyzed days or even weeks later. With Confluent, banks are better able to do just that, which is potentially invaluable to the company's operations.
Confluent is built on Apache Kafka -- an open-source distributed event streaming platform used by thousands of companies for high-performance data pipelines. Kafka software has been widely adopted by large companies, and roughly 80% of the Fortune 100 uses Kafka. Because Confluent's target customer base already runs their data on Kafka, it can be easy to attract customers who would rather outsource the management of this data processing and analysis.
It's also important to note that the founders of Confluent were also the founders of Kafka. In 2014, Confluent founders Jay Kreps, Jun Rao, and Neha Narkede built Apache Kafka, and now they are using Confluent to capitalize on their open-source creation. This means Confluent has innovative, visionary leaders at the helm, but it also suggests the company has real insight into how to best utilize this open-source platform to its fullest.
Confluent has become the gold standard for managing real-time data and attracted some big-name customers as a result. Confluent provides services to various industries, ranging from PayPal in the payment space to Walmart in the retail sector. Customers seem happy with the services they are getting: Confluent's net retention rate exceeded 130% in Q3 2021.
Massive importance leads to massive growth
Confluent's has been growing revenue sequentially every single quarter since Q4 2019. It reached $103 million in revenue in Q3 2021, a 68% jump from the year-ago quarter. The latest customer count now exceeds 2,500, and 664 are each spending over $100,000 annually.
Confluent's profitability is not as impressive. The company lost $96 million in Q3 -- representing 94% of revenue. Additionally, the company's free cash flow is negative, losing $20.5 million in free cash flow in Q3 alone. On the bright side, its loss as a percentage of revenue has decreased both year over year and sequentially, down from 224% of revenue and 99% of revenue respectively.
At a valuation of 49 times sales, the market is not factoring the company's net losses very much and appears to be focusing on its high growth potential. This means that the company is priced for perfection, and if the company fails to live up to the high standards of high-growth technology investors, the stock price could take a hit.
Continued dominance?
There is some explanation for Confluent's massive net loss. The company is emphasizing growth and expansion because the industry is expecting huge growth over the next three years. Confluent's total addressable market is forecast to grow at a compound annual growth rate of 22% through 2024, and reach $91 billion.
Confluent is guiding for $377 million in revenue for 2021, which represents 60% growth from 2020. If the company can continue adding customers and integrate them deeper within Confluent, it has a good chance of maintaining its leadership position as the real-time data analytics leader.
If you are looking to invest, just know that this stock is volatile. For investors who run a concentrated portfolio or are not willing to hold this company for five years or more, it might be better to look at other companies. However, for long-term investors with a diversified portfolio, it might be worthwhile to add a small position. This company has plenty of growth potential, and if it can obtain high penetration now, investors could be rewarded handsomely a few years down the road.
