The S&P 500 (^GSPC 1.33%) continues to set new record highs, extending the raging bull market which began when the index bottomed in October 2022. However, not every stock has followed along.
Confluent (CFLT 0.10%) stock is still trading 62% below its best-ever level which was set during the tech frenzy in 2021. It was undeniably overvalued back then, but the company's industry-leading data streaming technology has found a new use case thanks to artificial intelligence (AI), so now might be a great time for investors to buy.
In fact, the majority of the analysts tracked by The Wall Street Journal have assigned the highest-possible buy rating to Confluent stock, and not a single analyst recommends selling.
Image source: Getty Images.
Data streaming is increasingly important for modern businesses
If you wanted to watch a movie 20 years ago, you would have to go out and buy a DVD and play it on your DVD player. Today, companies like Netflix allow you to stream movies directly to your television using the internet, eliminating the need for discs and other hardware. Keep this analogy in mind as we dive into the importance of data streaming below.
Many years ago, businesses would store their valuable data on physical servers so they could access it later. Then cloud computing was introduced, which now allows them to store that information in centralized data centers managed by tech giants like Amazon, where it can be accessed online at any time. Data streaming platforms like Confluent add another layer of utility by enabling that data to be ingested, processed, and harnessed instantly.
To offer an example, data streaming can be used by sports betting platforms to provide customers with live in-game betting. The bookmaker has to recalculate the odds every time there is an event in the game (like a score or an injury), and then feed those new odds to the customer's smartphone app and accept bets -- all in a matter of seconds.
Retailers like Walmart also use Confluent's data streaming platform to manage their inventory in real-time. It allows them to feed accurate stock levels to customers who are shopping via their online stores, and also replenish the shelves in their physical locations before popular products run out.
But data streaming is also extremely important for AI chatbots and other applications, which need to ingest inputs (prompts) and produce outputs (responses) to the user instantly. Confluent says several leading AI companies are using data streaming, including OpenAI. As I mentioned above, data that would normally be warehoused and deployed at a later date can now be processed instantly, so AI applications are always working with the newest information.
The Confluent platform also allows businesses to build pipelines to seamlessly plug their internal data into models like OpenAI's GPT-4, which can turn a generic chatbot application into a useful virtual assistant for customers and employees.
NASDAQ: CFLT
Key Data Points
An enormous addressable market
Confluent had a record 5,800 total customers at the end of 2024, a 17% increase compared to the end of 2023. However, the number of customers spending a minimum of $1 million on its platform totaled 194, a much bigger increase of 23%. It highlights how important data streaming is becoming for larger, more complex organizations.
Confluent generated a record $922.1 million in subscription revenue during 2024, which was a 26% increase from 2023. That is a drop in the bucket compared to the size of the data streaming market, which management estimates will be worth $100 billion during 2025.
It's possible Confluent could have grown its revenue even faster in 2024, but it carefully managed its costs to improve its bottom line. Its total operating expenses increased by just 9.6%, which included a jump of just 8.4% in its marketing spending (its largest operating cost).
The company still lost $345.1 million on a GAAP (generally accepted accounting principles) basis, but that was a 22% improvement from its 2023 net loss of $442.7 million.
The picture looked even better from a non-GAAP perspective, which strips out the $417.1 million the company issued in stock-based compensation to its employees (a non-cash expense). Confluent actually generated a profit of $102.1 million on that basis, which was a whopping 682% increase compared to 2023.
No matter how you look at it, the company is making progress at the bottom line, which paves the way for a more sustainable business over the long term.
Wall Street is bullish on Confluent stock
The Wall Street Journal tracks 32 analysts who cover Confluent stock, and 18 have given it the highest possible buy rating. Three others are in the overweight (bullish) camp, while 10 recommend holding. Although one analyst has assigned the stock an underweight (bearish) rating, none recommend selling.
However, they aren't forecasting a great deal of upside over the next 12 to 18 months. Their average price target is $37.62, which is only 8% above where the stock trades as of this writing. The Street-high target is $42, which implies a more attractive potential upside of 20%.
From a valuation perspective, Confluent stock trades at a price-to-sales (P/S) ratio of 11.6 as of this writing, a 31% discount to its long-term average of 16.9 dating back to when the company went public in 2021.
Confluent stock looks attractive on that basis, but there is a caveat: Its average P/S ratio might be skewed by the 2021 period when it was trading at around 60, which was unreasonably expensive. That's the primary reason the stock is sitting 62% below its all-time high from that period -- its valuation was simply unsustainable.
CFLT PS Ratio data by YCharts
With all of that said, I think Wall Street's bullish sentiment is definitely justified based on Confluent's enormous addressable market, which could grow even larger as AI becomes a bigger part of its business. However, investors who buy the stock today should take a long-term view of five years or more to maximize their chances of earning market-beating returns.
