Cloudflare (NET +2.82%) and Confluent (CFLT +0.00%) both saw their share prices hit record highs during the peak of the growth rally in November 2021. But today Cloudflare and Confluent trade about 70% and 60% below their all-time highs.
Both hypergrowth darlings lost their luster as the macro headwinds throttled their revenue growth and rising interest rates popped their bubbly valuations. Should investors buy either of these out-of-favor stocks as a turnaround play today?
Image source: Getty Images.
What do Cloudflare and Confluent do?
Cloudflare's cloud-based content delivery network (CDN) accelerates the delivery of photos, videos, and other digital content for websites. It accomplishes that by storing cached copies of the digital media on edge servers that are located closer to the website's visitors than the original servers. It also blocks bot-based attacks with its cybersecurity services.
Confluent's cloud-based platform analyzes streaming data as it flows between an organization's applications. That "data in motion" is processed by Apache Kafka, an open-source software platform that Confluent's founders initially developed as a data-crunching tool at LinkedIn prior to its acquisition by Microsoft. Confluent isn't the only "Kafka-as-a-service" provider in town, but it's the largest one, and it's still led by one of Kafka's original developers.
Which company is growing faster?
Both companies are well-poised to profit from long-term digital trends. The market's demand for Cloudflare's CDN services will continue heating up as companies launch more media-intensive websites to capitalize on higher internet speeds, while the growing risk of bot-based attacks should convince its clients to use more of its cybersecurity services. Cloudflare believes its bot-blocking tools will eventually turn it into a "water filtration" system for the internet.
NYSE: NET
Key Data Points
Cloudflare's revenue rose 52% in 2021 and 49% to $975 million in 2022. But for 2023, it expects its revenue to only grow 31%-32% as the macro headwinds force more companies to rein in their software spending. Analysts expect its revenue to increase 31% to $1.28 billion as its adjusted EPS jumps 162%. On a generally accepted accounting principles (GAAP) basis, analysts expect it to narrow its net loss from $193 million to $166 million.
More companies will also use Confluent's services to analyze how their applications interact with each other in real time to make faster decisions. That represents an evolution of traditional analytics platforms that merely crunch static data points.
Confluent's revenue jumped 64% in 2021 and 51% to $586 million in 2022. But for 2023 it only expects 30%-31% growth as it faces many of the same macro headwinds as Cloudflare.
Analysts expect its revenue to rise 30% to $783 million this year, but it's still unprofitable by both GAAP and non-GAAP measures. On a GAAP basis, it's expected to slightly narrow its net loss from $453 million to $428 million.
NASDAQ: CFLT
Key Data Points
Cloudflare and Confluent are still growing rapidly, but they both face competitive threats. Cloudflare competes against a long list of similar CDN providers like Fastly and Akamai, while Confluent needs to deal with large cloud infrastructure platforms like Amazon Web Services (AWS) and Microsoft Azure -- which both integrate Kafka into their ecosystems. That pressure could make it difficult for both companies to turn consistently profitable on a GAAP basis.
The valuations and verdict
Cloudflare and Confluent look a lot cheaper than they did in late 2021, but neither stock is a bargain yet. Based on their enterprise values, Cloudflare trades at 17 times this year's sales, while Confluent has a slightly lower ratio of 13.
I wouldn't rush to buy either of these stocks right now, since high interest rates could highlight their weaknesses instead of their strengths. But if I had to pick one, I'd stick with Cloudflare for three reasons: Its moat is wider (because it isn't built on open source software), it's more profitable (at least on a non-GAAP basis), and the growth potential of its CDN and bot-blocking services is easier to grasp than Confluent's goal of reading data in real time as it flows between applications.
