Shares of Confluent (CFLT 2.98%) lost 28% of their value in the past year amid the broader stock market sell-off, and the bad news is that the data streaming platform provider is underperforming in 2023 as well.
Confluent's stock gained just 10% so far this year. For comparison, the tech-heavy Nasdaq-100 is up nearly 19% in 2023. It is worth noting that Confluent stock lost momentum after a solid start to the year. But this could be an opportunity for savvy investors to buy the stock before it regains its mojo. Let's see why.
Confluent is at the beginning of a massive growth curve
Confluent's offerings enable users to derive real-time insights from data. The company sees huge demand for its data-in-motion offerings as they help organizations save time and costs by connecting and processing their data in real-time.
More specifically, Confluent estimates that its total addressable market could be worth a whopping $100 billion in 2025. The company clocked revenue of $586 million in 2022, an increase of 51% over the prior year, which means that it still has a lot of room for growth ahead. The impressive jump in the company's revenue last year can be credited to the growth in Confluent's customer base, as well as the company's focus on gaining a bigger share of customers' wallets.
The company finished the fourth quarter of 2022 with 991 customers who generated annual recurring revenue (ARR) of $100,000 or more, a 35% increase over the prior-year period. The company derives 85% of its total revenue from these large customers. What's more, Confluent witnessed a 51% year-over-year increase in customers with an ARR of $1 million in the fourth quarter of 2022 to 133.
The jump in spending by Confluent's customer base isn't surprising. The company points out that customers adopting its cloud data platform can witness a $2.5 million reduction in ownership costs, save $1.4 million in development and operational costs, and reduce infrastructure costs by $1.1 million. In all, Confluent claims that its platform offers a payback period of fewer than six months to customers, who can also enjoy a massive return of 257% on their investments.
All this explains why Confluent customers end up spending more on the company's offerings over time. For instance, the company points out that an online travel services provider has increased spending 29-fold in six years, while a Fortune 50 bank bumped its spending nine-fold in four years. So as the demand for Confluent's data-in-motion platform increases, the company should be able to bring more customers into its fold and benefit from higher spending by its existing set of customers.
Morgan Stanley recently upgraded Confluent stock, citing the potential growth in the adoption of the company's cloud platform. The investment bank has a $30 price target on Confluent and gave it an overweight rating based on a survey in which 73% of respondents said they are focusing on cloud optimization initiatives. That would be a 22% increase from the stock's closing price on Friday, April 21.
Why investors looking for a growth stock may want to buy it now
There is no doubt that Confluent stock is expensive, with a price-to-sales ratio of 11.7. But that's well below where the stock was at the beginning of 2022.
CFLT PS Ratio data by YCharts
Additionally, Confluent is expected to clock consistently strong revenue growth through 2025.
CFLT Revenue Estimates for Current Fiscal Year data by YCharts
The solid top-line growth is expected to filter down to the bottom line as well. Confluent is expected to turn profitable on a non-GAAP (adjusted) basis in 2024, delivering estimated earnings of $0.08 per share as compared to this year's forecasted loss of $0.26 per share. What's more, analysts anticipate Confluent to clock 100% annual earnings growth over the next five years, which explains why it could deliver solid profitability from 2025.
CFLT EPS Estimates for Current Fiscal Year data by YCharts
All this indicates that Confluent could turn out to be a top cloud stock in the long run, as it is built for impressive growth, which is why savvy investors can consider taking advantage of the company's relatively attractive valuation before it goes on a bull run.
