It has been just under four years since Confluent (CFLT +0.00%) made its stock market debut in June 2021. A look at its stock price chart will show that investors in the data streaming specialist have endured a difficult time since November of that same year.
Confluent stock was in fine form in 2021 following its initial public offering. However, like many other young tech stocks in late 2021, the stock price began a downhill run late in the year. Some of these stocks eventually recovered. In Confluent's case, the stock lost 46% of its value since its initial public offering (IPO) and 74% when compared to its all-time high.
Let's check why that has been the case and see if this cloud computing stock has the ability to regain its mojo and jump higher over the next three years.
Image source: Getty Images.
Confluent's expensive valuation has been the stock's undoing
Confluent was trading at a whopping 37 times sales in 2021, which means that it needed to maintain high growth rates to justify its rich valuation. However, its sales growth rates have been dropping over the years, as we can see from the table below.
|
Fiscal Year |
Annual Revenue Growth |
|---|---|
|
2021 |
64% |
|
2022 |
51% |
|
2023 |
33% |
|
2024 |
24% |
Data source: Confluent quarterly reports.
The reduction in Confluent's top-line growth is a big reason why the stock has fallen out of investors' favor. As a result, it is now trading at just under 8 times sales, which is lower than its five-year average price-to-sales ratio of 12. Another thing worth noting is that Confluent's sales multiple is now in line with the U.S. technology sector's average sales multiple.
Buying Confluent at its current valuation could turn out to be a smart long-term move, as the company is now sitting on an added catalyst in the form of artificial intelligence (AI). Confluent's cloud-based data streaming platform is used by customers to bring data out of silos and connect it in real time to make decisions quickly.
NASDAQ: CFLT
Key Data Points
The company's platform finds applications in multiple areas such as inventory management, fraud detection, and customer service. It's now being applied in generative AI and agentic AI applications as well, as Confluent's platform allows customers to use relevant data in real time for training large language models (LLMs) and AI agents.
As a result, Confluent is now winning a bigger share of customers' wallets, along with bringing new customers into its fold, which should set the company up for robust long-term growth.
A massive addressable market points toward better times for the company
Confluent now sees its addressable market exceeding $100 billion this year. That's double its estimated addressable market four years ago. Even better, the accelerated growth in its customer base suggests that it is well on track to capitalize on this massive opportunity.
Confluent's overall customer base jumped by 20% year over year in the first quarter of 2025. That was a major improvement over the 9% year-over-year increase in its customer base in the year-ago period. Importantly, Confluent is gaining more business from its existing customers. This can be judged from the company's dollar-based net retention rate of 117%, a metric that compares its annual recurring revenue (ARR) from customers at the end of a quarter to the ARR from the same customer cohort in the year-ago period.
So, an ARR of more than 100% suggests that existing customers are spending more money with Confluent. The higher spending by Confluent's older customers is also driving a solid bump in its margins. The company's non-GAAP operating margin increased by six percentage points year over year in Q1. This explains why the company's non-GAAP earnings increased by 60% from the year-ago period to $0.08 per share.
The company has guided for $0.36 per share in earnings for 2025, which points toward a 24% increase from last year. However, don't be surprised to see Confluent doing better than that following the healthy increase in Q1, especially considering the pace at which it is adding new customers and encouraging existing ones to spend more money.
Not surprisingly, analysts are forecasting an acceleration in Confluent's bottom-line growth over the next couple of years.
Data by YCharts.
The stronger growth in Confluent's earnings in 2026 and 2027 points toward better times for the stock over the next three years, as the market could reward this impressive bottom-line jump with healthy gains. As such, buying Confluent right now makes sense from a long-term point of view. The correction in the company's stock price since its IPO has made it a better buy, considering its lucrative end-market opportunity and bright prospects.
