Confluent (CFLT 12.76%) and Snowflake (SNOW -0.82%) both help companies break down silos and organize large amounts of data. Confluent's cloud-based platform processes and analyzes "data in motion" as it streams between applications. Snowflake pulls data from a wide range of applications into a cloud-based data warehouse where it can be easily accessed by third-party analytics services.
Both silo-busting stocks hit record highs during the buying frenzy in growth stocks in 2021. But since then both stocks have withered as rising interest rates drove investors toward more conservative investments. Confluent's stock price is down nearly 80% from its all-time high, while Snowflake's market cap has melted by more than 60%. Could either of these out-of-favor hyper-growth stocks be worth buying again in this unpredictable market?
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Confluent's growth is cooling off
Confluent's revenue rose 51% to $586 million in 2022, compared to its 64% growth in 2021. It expects that slowdown to persist with 30%-31% growth in 2023 as it grapples with slower enterprise spending in a tough macro environment.
On the bright side, it continues to gain higher-value customers, meaning those that generate at least $100,000 in annual recurring revenue. That cohort grew by 35% to 991 customers in 2022, compared to its 43% growth in 2021. Its dollar-based net retention rate, which gauges its year-over-year revenue growth per existing customer, nearly reached 130%, while its remaining performance obligations (RPO), or the revenue it expects to recognize from its existing contracts, grew 48%.
Confluent's adjusted gross and operating margins both expanded in 2022, but it remains deeply unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures. On a non-GAAP basis, the company only narrowed its net loss slightly from $163 million in 2022 to $161 million in 2023.
That persistent lack of profitability is worrisome, because Confluent doesn't have a lot of pricing power in its niche market. Confluent was built on the open-source data streaming platform Kafka, which is free for businesses to license and modify. Therefore, many larger companies might prefer to simply develop their own internal Kafka-powered platforms instead of paying fees for Confluent's more comprehensive "Kafka-as-a-service" platform.
Snowflake also faces a near-term slowdown
Snowflake's product revenue, which accounts for most of its top line, surged 70% to $1.94 billion in fiscal 2023 (which ended this January) -- but that still represented a slowdown from its 106% growth in fiscal 2022. It expects its product revenue to only rise 40% in fiscal 2024 as it faces many of the same macro headwinds as Confluent.
But like Confluent, Snowflake is still locking in higher-value customers. Its total number of customers that generated a 12-month trailing product revenue of at least $1 million grew 79% to 330 at the end of 2022. It also maintained a high net revenue retention rate of 158%, but that represented a slight pullback from its retention rate of 178% in fiscal 2022.
Snowflake's adjusted gross and operating margins are also improving. But unlike Confluent, Snowflake is firmly profitable on a non-GAAP basis. Its non-GAAP net income rose from just $2 million in fiscal 2022 to $90 million in fiscal 2023, and its profitability could continue to improve as economies of scale kick in.
Snowflake also expects to generate $10 billion in product revenue by fiscal 2029, which implies its top line will grow at a six-year compound annual growth rate (CAGR) of 32% from fiscal 2023. By the final year, it expects its $1 million-plus cohort to more than quadruple to 1,400 customers. However, stiff competition from other cloud data warehousing platforms -- including Amazon's Redshift and Microsoft's Azure Synapse -- could still disrupt those ambitious plans.
The valuations and verdict
Confluent's enterprise value of $5 billion values it at about 7 times this year's sales. Snowflake, which has an enterprise value of $44 billion, trades at 15 times this year's sales.
Confluent might initially seem like the better bargain, but its slower growth, persistent losses, and narrow moat against open-source Kafka competitors arguably makes it the weaker investment. Snowflake isn't cheap, but its higher growth rates, dazzling retention rates, and rising profits all make it a more promising cloud play than Confluent right now.
