After a very strong performance for initial public offerings (IPOs) in 2020, the IPO class of 2021 has generally had a much rougher go of things. Investors already started moving out of speculative stocks with forward-looking valuations last year, and sell-off momentum has continued in 2022 as the market has weighed risk factors including high inflation and rising interest rates.
No doubt about it, Mr. Market isn't high on growth stocks right now. And having recently gone public probably isn't benefiting valuations for relevant companies in the category, either. However, taking advantage of dramatic sell-offs on promising stocks and zigging when market sentiment is otherwise zagging could have big payoffs for long-term investors.
Read on for a look at a company less than a year removed from its IPO that's trading down big and is worth snatching up right now.
Image source: Getty Images.
This innovator trades at an attractive discount
Confluent (CFLT -3.12%) provides data-streaming services that are helping businesses rise to the demands of the next stages of analytics.
Rather than storing data locally and analyzing it, the company offers services built on top of the open-source Apache Kafka software that allow data to be streamed, analyzed, and acted on in real time. In many ways, this "data in motion" approach is better suited for the evolution of analytics and the explosion of new data than the "data at rest" approach that's still far more common.
Confluent provides two core service offerings: one that can be used for on-premise, cloud, and hybrid platforms, and another specifically tailored for cloud-only setups. Between these two product families, the company is positioned to meet the needs of any business seeking data-streaming services, and it has a promising growth outlook.
The data-streaming specialist went public last June, and its valuation immediately jumped. However, its share price has since pulled back amid guidance for another substantial loss this year and increased investor aversion to growth-dependent software stocks. Confluent is now down roughly 26% from market close on the day of its IPO and 65% from its high.
Confluent is growing at an impressive clip
The data-services company posted incredible results last year, with sales growth actually accelerating compared to the already-fantastic performance it recorded in 2020.
Image source: Confluent.
The cloud-focused Confluent Cloud product saw revenue triple last year, and it's poised to continue powering strong growth for the company. While it only accounted for roughly 24% of annual sales, the unit is growing fast enough that it has now reached more than 50% of new annual-contract-value (ACV) bookings. The company also posted an overall dollar-based net retention rate of more than 130%, which means that customers that were already using its services increased their spending by more than 30% for the year.
This opportunity is just starting to unfold
Continuous real-time processing will likely become increasingly crucial for a growing number of businesses. Check out the chart below for a look at the segment breakdown of Confluent's total addressable market (TAM) last year and management's estimate for addressable market expansion.
Image source: Confluent.
Management sees its TAM increasing roughly 83% from 2021 to 2024. With the company capturing less than 1% of its addressable market last year and demand for data-in-motion services still in the early stages of heating up, there's huge room for growth here.
With a market capitalization of roughly $9.1 billion, Confluent is still in mid-cap territory and has room for explosive growth from current levels. The move to continue spending heavily on research and development, and on sales and marketing means the company will post another loss year. Still, the strategy should help position the business for success over the long term. The company's valuation profile might be out of sync with the market's current tastes, but this deeply discounted stock looks poised to be a winner.
