There have been a record-breaking number of initial public offerings (IPOs) in 2021. Almost $90 billion was raised from IPO proceeds in the first eight months of the year, a figure that tops any other full year.
The IPO market has been hot with lots of new companies to consider investing in. But finding the best stock opportunities in such a crowded field can be difficult. With so many IPO stocks to choose from, you might be struggling to know if any are even worth a closer look.
Well, I think I have found one that could pay off for a long-term investor. Let's take a closer look and see if this is a good tech IPO to buy in December.
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Interoperability elevates this company's performance
Confluent (CFLT 2.30%) is helping enterprises harness the power of data in motion. Typically, companies accumulate data from their operations software and send it to a "data warehouse" where it gets batch-processed at some point overnight or in the future. The problem is that business interactions are getting increasingly faster and increasingly occur 24 hours a day. This creates an urgency for data analysis that the data warehouse method just can't keep up with. More and more businesses are finding cannot wait overnight to get insights on yesterday's data; they have to get it now.
A free-to-use, open-source platform called Apache Kafka was developed to help businesses analyze their data in real-time. With Kafka, businesses can continuously analyze the steady stream of data they receive and catch those key insights right away. This real-time insight is important to some of the largest enterprises in the world, which is why 80% of the Fortune 100 use this open-source platform.
The problem with Kafka is that it can be difficult to manage in-house, especially when a large, multibillion-dollar enterprise is involved. This is where Confluent comes in. It manages a company's Kafka stream and allows the company to focus on the business-critical insights being generated.
Confluent stands out among competitors because of its interoperability. Confluent can be used in the cloud and on-premise, and its cloud solution is growing rapidly. In its last quarter, revenue from Confluent Cloud exploded 245% year over year to $27 million. Confluent's solution can also add other features like security and governance, and other processing features like SQL processing. Lastly, Confluent can work with all of the major cloud providers.
Top-notch management and workplace satisfaction
Its differentiated product is not the only competitive advantage that the company has. Confluent's three co-founders -- Jey Kreps, Neha Narkhede, and Jun Rao -- were also the founders of Kafka, the open-source service.
When these three gave Kafka to the Apache Software Foundation to make it free for everyone, they realized how hard it was to use in the real world for non-expert developers. They then created Confluent to monetize their open-source creation while working at LinkedIn, a Microsoft subsidiary. This inside knowledge gives them an unreplicable edge over competitors. After all, who would you want to have to manage your Kafka service? A random developer, or the people who actually invented Kafka?
Confluent employees love working there. Good company culture and a positive environment are two critical aspects of any company, especially a young one, and employees have rated Confluent a 4.3 out of 5 on Glassdoor. Glassdoor is a popular service where employees rate companies, with a 4 or higher being considered a very good score. Even better, 99% of employees approve of Kreps' work as CEO.
This mix of visionary leadership and positive culture often bodes well for the future of a business. Confluent has rapidly expanded its revenue, growing 67% year over year in the third quarter to $103 million. Moreover, the company has increased its revenue sequentially every quarter since the fourth quarter of 2019.
What could go wrong?
The biggest worry with Confluent is its net loss. The company has lost $260 million in the trailing 12 months, which represents 77% of revenue over that period. What's more concerning is that its net loss margin has been increasing. In Q4 of 2020, its net loss margin was 46%, but now it is 93%.
Confluent does have a reason for this increase in spending. The company is rapidly spending in an effort to acquire a lot of customers now to capitalize on the large growth it sees ahead. Management sees its addressable market almost doubling by 2024 to $91 billion, and the company wants to acquire customers now in order to make sure it can capitalize on this anticipated growth. If it can spend to acquire customers now, in theory, the company will spend less in the coming years as it grows faster.
Confluent stock IPO'd in June at $36 a share and is trading up about 97% since going public. But the stock is also down about 25% from highs set in early November. Like many tech growth stocks, it got hit by broader market jitters over the past month or so. The stock is admittedly trading at a premium right now and is valued at about 56 times sales. If that valuation scares you, Confluent could be a watch list stock, but it might just be one that always looks expensive. That is why I think now is a great time to buy.
