More than 80% of Fortune 100 companies use Apache Kafka, an open-source distributed event streaming platform used to connect applications and services. Kafka is a complicated piece of software. Confluent (CFLT 2.98%), co-founded by the co-creators of Kafka, offers a managed Kafka platform that is quickly being adopted by large enterprises.
Confluent stock has been hammered since peaking in late 2021, but an analyst at Mizuho sees brighter days ahead. Mizuho maintained a "buy" rating on the stock last week while bumping up its price target from $34 to $38. The analyst expects data streaming adoption to soar in the future, driven partly by growing demand for generative artificial intelligence.
Strong growth and rising free cash flow
The Mizuho price target bump comes on the heels of a solid Q4 report from Confluent. Revenue jumped 26% year over year to $213.2 million, with Confluent's cloud-based offering growing by 46% and enjoying its first $100 million quarter.
Free cash flow was in negative territory for 2023, but it did turn positive in the fourth quarter. Confluent expects free cash flow and adjusted operating margin to reach breakeven in 2024, a big step toward sustainable profitability. Confluent ended the year with 1,229 customers spending at least $100,000 annually on its products. That number was up 21% from 2022.
Is Confluent a buy?
Confluent is emerging as the standard choice for enterprises looking to adopt Kafka or move away from a self-managed installation. There are plenty of alternatives available, but Confluent has the advantage of having the co-creators of Kafka involved.
Confluent's stock appears to be priced optimistically. With a market capitalization of about $10 billion, shares trade for more than 10 times forward sales and nearly 200 times forward adjusted EPS. Profits could rise much faster than revenue in the coming years as Confluent scales, but investors are paying a high price today.
At $38 per share, Confluent would be even pricier. While the company could grow into its valuation over time, any sign that trouble is brewing could cause the stock to plunge.
