What happened
Shares of Confluent (CFLT 2.98%) are losing ground in Wednesday's trading following a downgrade from an analyst firm. The data software company's stock was down 7.9% as of 3:15 p.m. ET, according to data from S&P Global Market Intelligence.
Guggenheim analysts published a note on Confluent this morning, downgrading the stock from buy to neutral. An insider selling disclosure published with the Securities and Exchange Commission (SEC) published the day before may also be factoring into the stock's sell-off.
So what
In addition to lowering their rating on the stock, Guggenheim's analysts removed their one-year price target of $29 per share on the stock. With the stock trading at roughly $37 per share prior to the note's publication, the analyst target had already been met and exceeded, but the decision not to issue a price target at least on par with its current valuation level sent warning signs to investors.
The analyst downgrade also followed the disclosure that Confluent board director Jonathan Chadwick had sold shares on Monday. While the filing showed that Chadwick had acquired 16,125 shares of the company's Class A stock on June 12, it showed that he had sold the same amount of Class A stock on the same day. The filing also showed that he had sold 16,125 shares of the company's Class B stock.
Now what
While the Guggenheim analysts downgraded their rating on Confluent and didn't issue a new price target, their coverage on the stock wasn't negative. The analysts said they still believed in Confluent's long-term opportunity and that it would be able to eventually reach its long-term free-cash-flow margin target of more than 25%. The downgrade appeared to primarily stem from near-term valuation concerns.
CFLT PS Ratio (Forward) data by YCharts
With the stock still up roughly 54% year to date even after today's pullback and valued at more than 13 times this year's expected sales, Confluent shares could see continued volatility in the near term. The company has been expanding rapidly and expects to increase sales roughly 30% annually this year, but its highly growth-dependent valuation means this is a high-risk, high-reward stock.
