The Nasdaq Composite index has been in fine form so far this year with gains of 31%, driven by an impressive rally in tech stocks that are benefiting from the cooling inflation and the growing popularity of trends such as artificial intelligence and cloud computing. Confluent (CFLT +0.00%), which is one of the components of the Nasdaq Composite index, has benefited big time from this surge as its shares are up nearly 52% in 2023.
The good part is that Confluent's rally seems set to continue. Shares of the data streaming platform provider jumped 16% after the company released its second-quarter 2023 results on Aug. 2, as it comprehensively beat Wall Street's expectations on both revenue and earnings.
What's more, Confluent's guidance for the current quarter turned out to be way better than expectations. This wasn't surprising, as the company is on track to take advantage of a massive multi-billion-dollar market opportunity.
Let's look at the reasons why this Nasdaq stock could soar higher.
NASDAQ: CFLT
Key Data Points
Confluent's rapid growth seems sustainable
Confluent's Q2 revenue increased 36% year over year to $189 million, which was well ahead of the $182 million consensus estimate. Even better, non-GAAP earnings came in at $0.00 per share for the quarter, which was a massive improvement over the year-ago period's loss of $0.16 per share. Analysts were expecting a loss of $0.06 per share.
The company delivered a terrific improvement in its margins last quarter, with its non-GAAP operating margin coming in at a negative 9.2% as compared to the prior-year period's negative figure of 33.5%. The guidance was the icing on the cake. Confluent expects $194.5 million in revenue in the current quarter, which would be a 28% increase over the year-ago period.
Confluent management expects the company to break even on the bottom line in Q3. Again, that would be a nice improvement over the adjusted loss of $0.13 per share in the year-ago period. Confluent's full-year guidance is also quite impressive, as it expects its top line to land between $767 million and $772 million. The midpoint of that guidance range would translate into a 31% jump over the prior year, and it is well ahead of the $693 million consensus estimate.
But don't be surprised to see Confluent beat its guidance and deliver stronger growth in 2023 and beyond, given the end-market opportunity it is sitting on. The company's cloud-based data streaming platform allows customers to gain real-time insights from their data. Confluent customers can connect their data and process it in real-time using its cloud-based offering, as a result of which they can make decisions quickly as compared to the traditional method of storing data in silos and then processing it in batches later on.
Confluent claims that its offerings can help customers reduce their total cost of operations by as much as 60% when compared to traditional databases. This explains why its customers have increased the adoption of its offerings considerably over time. For instance, Confluent's annual recurring revenue (ARR) from a payment card provider has increased 34 times in just over five years, while the ARR from a Fortune 50 bank has jumped nine times in less than five years.
The healthy growth in customer spending is evident from the improvement in Confluent's remaining performance obligations (RPOs). This metric is representative of the contractually committed revenue that Confluent expects to recognize going forward. Confluent's RPO jumped to $791 million last quarter, an increase of 34% over the year-ago period. The company expects to recognize two-thirds of this as revenue over the next year, suggesting that it has built a healthy revenue pipeline for both the short and the long term.
It is also worth noting that Confluent finished Q2 with just over 4,800 customers, an increase of 17% over the prior-year period. However, the number of customers with at least $100,000 in ARR increased at a much faster pace of 33% as compared to the year-ago quarter, while those with at least $1 million in ARR increased at a much better pace of 48%.
Confluent seems to be in a solid position to sustain this healthy pace of growth for a long time, given that it is currently sitting on an addressable market worth $60 billion, which is expected to jump to $100 billion by 2025. Confluent's full-year revenue forecast indicates that it hasn't filled even 1% of its long-term addressable market opportunity.
How much upside can investors expect?
Analysts expect Confluent's revenue to increase substantially over the next couple of years.
CFLT Revenue Estimates for Current Fiscal Year data by YCharts
The company should be able to hit those targets given the points discussed in the previous section. Assuming Confluent does generate $1.25 billion in revenue in 2025 and continues to command its current price-to-sales ratio of 15 at that time, its market cap could jump to $18.7 billion. That would be a big jump of around 80% from Confluent's current market cap of $10.3 billion.
Of course, Confluent stock carries a rich sales multiple right now, but that seems justified given the pace at which it is growing and its huge end-market opportunity. That's why investors looking to buy a growth stock right now should consider buying Confluent before it flies higher and becomes more expensive.
