Shares of data streaming specialist Confluent (CFLT 2.09%) have sat on the sidelines this year as other technology stocks have soared. The company's stock has dropped around 14% since the start of 2025, and even a buoyant stock market over the past few months has failed to give the software company a boost.
While a beaten-down growth stock like Confluent may look tempting, investors need to keep an eye on a few things.
Image source: Getty Images.
Solid growth and big losses
Confluent has built its business around Apache Kafka, a widely used open-source data streaming platform. Confluent's managed cloud-based platform takes the pain and complexity out of deploying and running Kafka, providing a strong value proposition for enterprises dependent on Kafka to link together applications and data.
Confluent reported its first-quarter results on April 30. Revenue rose by 25% year over year to $271 million, driven by 34% growth for Confluent Cloud, which accounted for roughly 55% of total revenue. The rest came from the company's self-managed solutions. Confluent reported a GAAP net loss of $67.6 million, or $0.20 per share, although free cash flow was in positive territory.
While Confluent beat analyst expectations across the board, the stock failed to rally. One reason could be weakness among larger customers. Confluent ended the first quarter with 1,412 customers spending at least $100,000 annually on the platform, up just 12% year over year. The company's platform is mainly geared toward enterprises, so this sluggish growth rate may have been concerning to investors.
The economy is a wildcard
Confluent's platform is certainly mission-critical for companies that use it widely. The company acts as the glue that links together different applications, so ripping it out and moving to an alternative carries significant switching costs.
However, that doesn't mean that Confluent is immune to prevailing economic conditions. "For our cloud business, some of our larger customers began slowing the pace of new use case addition and focusing on cost optimization efforts in March," said Confluent CFO Rohan Sivaram during the first-quarter earnings call. On top of that slowdown, the company doesn't believe it will see a recovery in consumption any time soon, given the economic backdrop.
One silver lining is that consumption activity for smaller cloud customers has remained stable. Those smaller customers could eventually follow suit and begin looking to optimize costs. For now, however, they're holding up better than Confluent's larger customers.
A lofty valuation
Despite the poor performance of Confluent stock this year, the valuation is a source of risk for investors. Confluent is valued at roughly $8.25 billion, which works out to just over 7x the average analyst estimate for fiscal 2025 sales. Confluent isn't profitable on a GAAP basis, but based on analyst estimates for non-GAAP earnings this year, the forward price-to-earnings ratio stands at 67.
Analysts expect revenue growth of just 19% in 2025. For a company with a slowing growth rate against a backdrop of economic uncertainty, those valuation multiples seem rich.
There's also plenty of competition in the world of managed Kafka. Not only do the large enterprise-focused cloud platforms, like Amazon Web Services, offer their own managed Kafka services, but so do smaller cloud platforms, like DigitalOcean.
While Confluent is set to exceed $1 billion in annual revenue this year, potential investors need to consider the company's sensitivity to the macro-economic environment, as well as the stock's valuation, before diving in.
