An initial public offering (IPO) is when a private company looks for funding from the public and lists its shares on an exchange like the Nasdaq or the New York Stock Exchange. Its stock is then traded freely between investors, with its price determined by market forces.
Confluent (CFLT 1.30%) is a revolutionary data streaming company that hit the public markets on June 24, 2021, priced at $36 per share. It soared to an all-time high of $93.60 in the same year, but it has since fallen to just $23.03 amid the broader sell-off in the tech sector.
That means IPO investors would be sitting on a loss of 36%. But that result isn't necessarily reflective of the company's impressive progress. Here's why Confluent stock is a buy now.
Confluent: The past, present, and future
In 2008, a team of employees working for professional networking platform LinkedIn (now owned by Microsoft) developed a new tool called Apache Kafka. It was designed to help LinkedIn process and act on data coming from its user feed in real time, which was becoming much easier thanks to the onset of cloud computing. Historically, data was warehoused on-premises and analyzed after the fact, but the cloud had the potential to make that process practically instant.
Apache Kafka introduced LinkedIn (and the rest of the corporate world) to data streaming for the first time. But the list of use cases continued to grow rapidly as more organizations moved into the cloud, so the team departed LinkedIn to launch Confluent in 2014, which enabled them to commercialize data streaming and offer a whole host of related solutions.
Confluent has since gone from strength-to-strength, and now serves thousands of customers, including some of America's largest companies. Retail giant Walmart, for example, uses Confluent to manage inventory. Confluent connects all of Walmart's physical stores and its online channels to monitor sales across the entire ecosystem in real time, so whenever a product is sold, it's replenished as necessary.
Put simply, Confluent is the reason Walmart is almost always fully stocked across its locations -- but why is that so important, and what's the end result? Trust, and customer satisfaction. People know they can walk into any Walmart store and find what they're looking for, so they do.
$1 billion in revenue might be around the corner
Confluent's financial progress has been remarkable. It delivered $585.9 million in revenue during 2022, up 51% compared to 2021. It has now increased more than threefold since 2019, cementing a compound annual growth rate of 57.6%.
The company just issued guidance suggesting it could generate up to $765 million in revenue during 2023, which would represent below-trend growth of 31% amid tough economic conditions. But even at that rate, it would be on track to cross $1 billion in revenue by 2025.
Large organizations could help drive Confluent to that target. At the end of 2022, it had 991 customers spending at least $100,000 annually, up 35% from 743 customers at the end of 2021.
But retention will also be key. Confluent has a net dollar retention rate of almost 130%, which suggests existing customers are spending 30% more money now than they were a year ago.
Image source: Getty Images.
Confluent has a substantial opportunity ahead
Confluent's best years are still to come. The company estimates its addressable market is worth $60 billion, and it wants to remain the dominant player over the long term.
International Data Corporation (IDC) predicts that 90% of the Global 1,000 companies will be using data and event streaming technologies by 2025 to improve outcomes across their businesses. Similarly, the IDC recently found that of the organizations currently using data streaming, 80% of them plan to invest in new capabilities over the next 12 to 18 months. It emphasizes the increasingly essential nature of this industry.
Confluent does face some short-term challenges, though. It has always focused on growth at the expense of profitability. However, in the current economic climate, investors have shunned companies making net losses, which is why Confluent stock has tumbled. But the company is now adjusting its strategy to improve its bottom line, including by trimming costs; it's laying off 8% of its workforce and shrinking its office space as part of those plans.
But there's no denying the long-term potential of the data streaming industry. Investors who buy Confluent stock today are getting in at a 36% discount to its IPO price, yet the company's revenue is substantially higher than it was back then, plus it's serving more customers than ever. Now, Confluent is working to achieve profitability by the end of this year.
All signs point to upside, especially over the long term.
