Shares of Confluent (CFLT 2.98%) were in the doghouse last week following the release of the company's third-quarter results after the market closed on Nov. 1, crashing nearly 44% in a single session.
Investors were quick to press the panic button because of its weaker-than-expected guidance. However, Confluent stock rose 9% the following day, suggesting savvy investors took advantage of its post-earnings crash to buy more shares. That's not surprising, as Confluent sits on a huge end-market opportunity that should allow it to sustain impressive levels of growth for a long time to come.
As shares of the data streaming platform provider now trade at an attractive valuation, it makes sense for investors to buy the stock -- it should be capable of delivering robust long-term upside. Let's take a look at the reasons why.
Confluent's guidance points toward a slowdown
Confluent reported Q3 revenue of $200 million, which was up 32% year over year. Even better, the company swung to non-GAAP earnings of $0.02 per share from a loss of $0.13 per share in the year-ago period. Wall Street would have settled for break-even earnings on $196 million in revenue, but Confluent eased past consensus estimates thanks to its improving customer count and a bump in spending by its existing customers.
More specifically, Confluent ended the quarter with just over 4,900 customers, an increase of 16% over the prior-year period. The number of customers who have generated annual recurring revenue (ARR) of at least $100,000 increased at a faster pace of 25% year over year. What's more, customers with more than $1 million in ARR increased 38% from the year-ago quarter.
However, investors panicked at Confluent's current-quarter guidance of $204.5 million in revenue at the midpoint. Analysts predicted $212 million in revenue this quarter, but slower spending by two key customers and macroeconomic pressures dented the company's guidance. According to CEO Jay Kreps on the latest earnings conference call:
One online gaming company moved workloads back to their own data center, and one of our largest customers ramped slower as they are in the process of being acquired.
Kreps added that Confluent saw a slowdown in the consumption of its services thanks to other factors as well, such as the Middle East conflict and a potential government shutdown in the U.S. These pressures explain why Confluent's remaining performance obligations -- a metric that provides an idea of the company's future revenue performance, as it refers to the total value of contracts that are yet to be fulfilled -- increased 24% year over year to $824 million.
This was slower than the company's actual revenue growth, and well below the 72% year-over-year jump it recorded in its remaining performance obligations in the third quarter of 2022. Also, Confluent's guidance points toward a sharp deceleration in growth. The company's top line is on track to jump 21% year over year in the current quarter. Its full-year revenue guidance of $768.5 million would be a 31% improvement over last year.
For 2024, Confluent forecasts a 22% jump in revenue. So Confluent is still delivering respectable growth despite a slowdown in consumption. More importantly, the company's growth could pick up given the massive $60 billion total addressable opportunity it is sitting on. After all, Confluent's platform allows customers to get more out of their data. Customers don't need to store data in silos in a traditional way with Confluent's offerings. They can connect data and process it in real-time to make quick decisions.
This explains why Confluent's top line is expected to grow at a healthy pace for the next couple of years.
CFLT Revenue Estimates for Next Fiscal Year data by YCharts
Confluent has real potential for a healthy upside
The table above indicates that Confluent's revenue could hit $1.17 billion in 2025. Assuming Confluent does achieve that level and maintains its current price-to-sales ratio of 7, its market cap could jump to just over $8 billion. That points toward a potential upside of 48% from current levels.
It is worth noting that Confluent stock is currently cheaper than before, as it was trading at more than 11 times sales at the end of 2022. So investors looking to buy a growth stock may want to take advantage of the recent dip in Confluent, as it could regain its mojo thanks to the huge addressable market it serves.
