Confluent (CFLT -5.77%) is a leader in data streaming, which is the technology responsible for many of our live digital experiences. For example, it's the magic behind real-time inventory information when we shop online, which tells us whether a product is in stock before we hit the buy button.
Confluent just reported its financial results for the first quarter of 2024 (ended March 31), which revealed further progress toward capturing what could be a $100 billion addressable market in 2025. Its stock popped following the release, and it's sitting on a 36% gain this year so far -- but it remains 67% below its all-time high, so it still has some work to do.
The Wall Street Journal tracks 29 analysts covering Confluent stock, and the majority have given it the highest possible buy rating. Not a single one recommends selling. Wall Street doesn't always get things right, but here's why investors might want to pay attention to the bullish consensus on this occasion.
Data streaming has a growing number of use cases
The year is 2003. Beyonce just dropped her new album, "Dangerously in Love," and you desperately want to hear it. You race down to the local record store and buy a physical copy on disc. You take it home, insert it into your CD player, and blast it on repeat for hours. How times have changed. Today, you can access unlimited amounts of music through streaming services like Spotify, which stores songs in its data centers and feeds them to your smartphone in real-time. No discs or clunky hardware are required.
Conceptually, data streaming is quite similar. Businesses used to collect customer and operational data and store it on physical servers located onsite, and managers would come back at a later date to analyze it. They can now store that data in centralized data centers and access it instantaneously, which is a practice called cloud computing.
Data streaming allows businesses to ingest their data, process it, and analyze it in real-time in the cloud. This means they can spot trends far more quickly and pivot their sales strategies to suit, and it also allows them to create live experiences for customers to drive more sales.
Take global tire manufacturer Michelin, for example. It uses Confluent to track the real-time flow of products across its enormous network, which spans 170 countries, so distributors and customers always know when and where a tire is available for purchase. The company estimates it has reduced its operating costs by 35% thanks to data streaming's ability to drive efficiency.
Artificial intelligence (AI) is a new but fast-moving opportunity for Confluent. A growing number of businesses are using its platform to create AI applications, and even the industry's leading start-up, ChatGPT creator OpenAI, is a customer. One airline used its live data streams through Confluent to build a virtual agent capable of helping customers book and cancel trips, which reduces human agent costs by hundreds of millions of dollars per year.
Image source: Getty Images.
Strong (but moderating) growth, led by high-spending customers
Confluent generated $217 million in revenue during the first quarter. It represented 25% growth compared to the year-ago period, and it was also above the company's forecast of $212 million. However, that growth rate has steadily decelerated over the past year because management is carefully controlling costs to hedge against the challenging economic backdrop.
As a result, Confluent's operating costs fell by 5.2% in Q1 (helped by the absence of a one-off restructuring charge in the year-ago period). Marketing costs did tick higher by a modest 2.1%, but that's far less than the company would normally increase its spending in that area. Simply put, pulling back on such growth-focused expenditures can lead to fewer opportunities to generate revenue.
But it does come with one major benefit. Growing revenue plus shrinking costs equals more money flowing to the bottom line. As a result, Confluent shrank its net loss by 39% year over year to just $92.9 million. On a non-GAAP (adjusted) basis, which strips out one-off and non-cash expenses, the company generated a profit of $15.8 million.
Overall, Confluent is still experiencing strong demand from customers, particularly those in its highest-spending cohorts. It served 5,120 businesses in Q1, and 1,260 of them were spending a minimum of $100,000 annually, which was up 17% year over year. The number of businesses spending at least $1 million annually jumped 24% to 168. It highlights how important data streaming has become to large organizations.
Wall Street is bullish on Confluent stock
Confluent stock peaked in 2021 -- as did many technology stocks -- at the crescendo of the pandemic-era tech frenzy, which was driven by waves of government stimulus and record-low interest rates. A combination of the reversal in those conditions, and the company's slowing revenue growth, have contributed to the 67% decline in its stock price from its all-time high.
However, as I touched on earlier, that slowing growth comes with the benefit of an improving bottom line. If Confluent continues on this trajectory and achieves generally accepted accounting principles (GAAP) profitability to accompany its recent non-GAAP result, it will have a more sustainable business that won't require a cash infusion in the future, whether through debt or a dilutive equity raise. When economic conditions are more certain in the future, the company can easily pivot back to a more growth-oriented posture if needed.
With all of that said, Wall Street remains extremely bullish on Confluent stock. Of the 29 analysts tracked by The Wall Street Journal, 17 have given it the highest possible buy rating. A further three are in the overweight (bullish) camp, while eight recommend holding. One analyst is in the underweight (bearish) camp, but none recommend outright selling.
The Street isn't right every time, but the Confluent story stands on its own two feet. Based on the company's revenue, it has barely scratched the surface of its addressable opportunity, which could top $100 billion next year. The proliferation of new technologies like AI might even drive that number higher.
