Confluent Stock Has 26% Upside, According to 1 Wall Street Analyst

Analysts at Mizuho have become a bit less optimistic about Confluent (CFLT -2.94%). On Monday, they lowered their price target on the data streaming company's shares from $38 to $36. However, that new target still represents a potential upside of 26% from the current price, and Mizuho maintained its buy rating on the stock.

A mixed bag

Confluent specializes in helping enterprises handle complex data streaming workloads using Apache Kafka, a popular open-source platform. While any company can install and run a Kafka installation, running the complex piece of software is not for the faint of heart.

Mizuho sees strong demand for Confluent's managed cloud Kafka platform, particularly related to cybersecurity and artificial intelligence. It also believes that the large cost optimizations that enterprise clients have been making are now complete, which should take some pressure off Confluent's top line. Its revenue growth has been slowing in recent quarters, and management said it was expecting just 21% growth in the first quarter of 2024.

On the flip side, Mizuho noted that some deals are being pushed out, and that new customer growth is proving a challenge. Additionally, demand from the U.S. public sector appears to be weak, according to the analysts. While Mizuho remains in the bull camp on Confluent, it has tempered its expectations.

Is Confluent stock a buy?

As  the company's growth rate slows, its bottom line should get more attention from investors. That's not a good thing. In 2023, Confluent posted a net loss of $443 million on revenue or $777 million. Its sales and marketing spending ate up a whopping 65% of revenue.

While the company produced positive free cash flow in the fourth quarter, for the full year, it booked a free-cash-flow loss of $124 million. While it is growing revenue swiftly, albeit at a slower pace than in the past, achieving that growth has come with a hefty price tag.

With Confluent trading for more than 11 times annual sales, investors should think long and hard before jumping into this pricey stock.