Wall Street analysts don't always get things right, but in the throes of a bear market, it can be useful to watch what the professionals are saying. With the market down and long-term investors looking to put their money to work so they can take advantage of the eventual recovery, finding a consensus opinion can make the difference in what gets picked.
Plenty of high-growth stocks are trading near their 52-week lows amid soaring inflation, rising interest rates, and worries about recession. Two growth stocks, in particular, have the attention of Wall Street analysts because their business models and potential markets show so much promise.
Analysts tracked by The Wall Street Journal have consensus overweight ratings on both Confluent (CFLT 0.07%) and Splunk (SPLK +0.00%). An overweight rating suggests investors should allocate a larger-than-average portion of their stock purchases to each company. Not a single analyst recommends selling either of them. Here's why.
NASDAQ: CFLT
Key Data Points
The case for Confluent
Roughly 80% of Fortune 100 companies use open-source software Apache Kafka to generate real-time data feeds of their businesses to use for a variety of purposes. Confluent is designed to help companies scale the platform and unlock additional capabilities related to the data collected. Live data streaming has become commonplace because consumers want more real-time functions from the technologies they use every day, so it's important for businesses to be able to analyze and optimize their data collection to meet that consumer demand.
Confluent had 4,120 business customers at the end of the recent second quarter of 2022, and the ways they use live data streaming are incredibly diverse. Domino's Pizza (DPZ +1.91%), for example, uses Confluent with Kafka to give franchisees real-time data on what's happening in their stores. It's also using the platform to refine its marketing to consumers, so they see more of what they want, which increases the likelihood they'll make a purchase.
Home improvement retailer Lowe's (LOW 0.72%) uses Confluent to ingest data from each of its 2,000 stores to track customer behavior. From there, it can make immediate adjustments to staffing levels and store hours and even sales methods like curbside pickup, to maximize efficiency across the whole of its business.
The need for advanced data analytics in the cloud is more pronounced than ever because companies continue to shift their operations and workflows online to achieve greater visibility. The larger the company, the more important that is, which is why the fastest-growing segments of Confluent's customer base are those spending at least $100,000 per year and those spending at least $1 million per year. In the second quarter, there were 857 of the former and 107 of the latter, up 39% and 53% year over year, respectively.
Confluent expects to generate up to $571 million in revenue for the whole of 2022, which would represent 47% growth compared to 2021. But in the second quarter, its remaining performance obligations (work it has contracted for but yet to complete or collect revenue for) soared 81% to $591 million, suggesting there could be a revenue acceleration in the cards in the future.
Confluent stock is trading down 65% year to date, giving it a far more reasonable price-to-sales ratio of 14.6. If you believe in the long-term potential for this stock, now is a good time to get in on it.
NASDAQ: SPLK
Key Data Points
The case for Splunk
Like Confluent, Splunk's specialty is ingesting mountains of live data, except it's keenly focused on using artificial intelligence and machine learning to deliver valuable insights to its customers, displayed on a simple dashboard. Splunk offers its platform in both on-premise and cloud configurations, but the cloud has been the main source of the company's growth and now accounts for nearly half of its total revenue.
Over 90% of the Fortune 100 companies have deployed Splunk in some way, and as of the second quarter of fiscal 2023 (ended July 31), it had 723 customers spending a minimum of $1 million annually. Of those, 352 were spending at least $1 million annually on Splunk's cloud products alone.
Domino's Pizza uses Splunk in addition to Confluent. Splunk is used to monitor more than 15 digital sales channels that drive over 65% of Domino's order volume in the U.S. The platform tracks every real-time transaction and feeds the live data back to Domino's, so if issues arise, incident response is swift all the way down to the individual store level. The use of machine learning means Domino's can also take proactive steps to prepare for periods of high traffic, ensuring all technical aspects of the business are delivering for customers as intended.
Splunk predicts that its total addressable market exceeds $100 billion in value across the three prongs of its business: Platform, security, and observability. Since the company had just $3.33 billion in annual recurring revenue (ARR) during the second quarter, it has a long runway for growth. That metric was up 27% year over year, so it's expanding at a modest pace -- but it gets better.
Splunk's cloud ARR has grown at a compound annual growth rate of 74% since fiscal 2019, compared to just 28% for non-cloud ARR. Cloud revenue made up just one-fifth of Splunk's total ARR then, compared to almost half most recently, and as it continues to become a larger part of Splunk's business, its overall ARR growth rate should accelerate.
Splunk's stock is trading down about 17% year to date, and its price-to-sales ratio (5.1) is near all-time lows for the stock. This too is a stock that should appeal to long-term investors.
