Shares of data streaming platform provider Confluent (CFLT +0.00%) have underperformed the stock market in 2023, failing to take advantage of the rally in technology stocks. While the tech-heavy Nasdaq-100 Technology Sector index is up more than 16% so far this year, Confluent stock has gained just 1%. It's also worth noting that the stock is down 33% from its 52-week high.
Instead of being discouraged, investors should look at this situation as an opportunity to buy this potential growth stock at an attractive valuation. Let's look at the reasons why they may not want to miss out on this Nasdaq growth stock.
NASDAQ: CFLT
Key Data Points
Confluent's latest results point toward a bright future
Confluent released its first-quarter 2023 results on May 3. The company's revenue jumped 38% year over year to $174 million, driven by the growing adoption of its cloud platform and a ramp up in spending by customers. It beat Wall Street's revenue and bottom-line expectations handsomely and delivered a bright full-year forecast.
The company's cloud revenue was up 89% over the prior-year period to $74 million. The faster growth of Confluent's cloud-native platform, as compared to the company's overall business, isn't surprising. That's because Confluent Cloud enables customers to connect and process their data in real-time. This gives them an advantage over the traditional method of storing data in silos and then processing it.
The real-time nature of Confluent's data streaming platform means that customers can quickly take advantage of the generated data to make business decisions, such as deciding taxi fares, optimizing the supply chain, managing their transport fleet, or making personalized recommendations. Not surprisingly, the company points out that customers can quickly recover their investments in its platform and generate solid returns, which is why they have been spending more money on its offerings.
The jump in customer spending is evident from a 34% year-over-year increase in the number of customers with more than $100,000 in annual recurring revenue (ARR) to 1,075 during the quarter. What's more, the number of customers with $1 million in ARR increased at a faster pace of 53% during the quarter to 135. Confluent's total customer count increased 14% year over year to almost 4,700 last quarter.
Additionally, the company's dollar-based net retention rate of over 130% for the quarter is another indicator of an increase in spending by existing customers on the company's solutions. That's because this metric compares the ARR of the company's customers to the ARR from the same cohort in the year-ago period.
This combination of healthy growth in the customer base and higher spending allowed Confluent to build a solid revenue pipeline, as is evident from the impressive increase in its remaining performance obligations (RPO). The company's RPO shot up 35% year over year to $743 million in Q1. The metric measures the amount of contracted future revenue that Confluent is yet to recognize, so the nice jump in this metric bodes well for the company's future.
More growth is in the cards
Confluent expects to deliver $762.5 million in revenue this year at the midpoint of its guidance range, which would be a 30% increase over last year. What's more, the company's non-GAAP net loss could shrink to $0.17 per share from $0.58 per share in 2022.
More importantly, Confluent sees its total addressable market (TAM) jumping to $100 billion in 2025 from $60 billion last year. That's why analysts are expecting the company's revenue and earnings to improve significantly over the next three years.
|
Year |
Estimated Revenue |
Growth (YOY) |
Estimated Adjusted Income/(Loss) per Share |
|---|---|---|---|
|
2023 |
$762 million |
30% |
($0.17) |
|
2024 |
$974 million |
28% |
$0.11 |
|
2025 |
$1.23 billion |
27% |
$0.26 |
Source: YCharts.
Such impressive growth should also result in terrific upside for investors in the long run. As the table above shows, Confluent's total revenue is expected to hit $1.23 billion in 2025.
The stock currently trades at 10 times sales. While that's expensive, the rich multiple seems deserved, given Confluent's healthy growth and its ability to sustain the same. Analysts, for instance, expect the company's bottom line to double each year for the next five years.
If we assume that Confluent commands a price-to-sales ratio of 10 after three years and its revenue hits $1.23 billion as estimated above, its market cap could jump to just over $12 billion. That would translate into 80% gains from current levels, which is why investors looking to buy a cloud stock should consider buying Confluent hand over fist before it soars further.
