We came across a bullish thesis on Confluent (CFLT) on ValueInvestorsClub by Mason. In this article we will summarize the bulls’ thesis on CFLT. Confluent shares were trading at $30.52 when this thesis was published, vs. closing price of $19.28 on Aug 2.
A team of software engineers at desks working on code for a cutting-edge cloud computing solution.
Confluent (CFLT), an infrastructure software company specializing in managed data streaming and stream processing, presents a compelling investment opportunity. Despite facing challenges, the company’s unique positioning, innovative products, and strategic initiatives make it a promising bet for the future.
Confluent was founded in 2012 by the creators of Apache Kafka, an open-source distributed streaming platform. The company went public in 2019, offering managed Kafka services both on-premises (48% of the business) and in the cloud (52% of the business). Kafka enables real-time data streaming with significantly reduced latency compared to traditional batch processing methods. This technology is crucial for applications such as real-time driver location updates for Uber and FedEx, and for GenAI-powered chatbots.
The recent introduction of Confluent’s Apache Flink product, an open-source protocol for stream processing, is set to drive significant upside to Confluent Cloud revenues. Flink allows real-time computations and analytics on data streams, with management estimating its Total Addressable Market (TAM) to be even larger than Kafka’s $60 billion TAM. While management and analysts have conservatively projected Flink’s material impact to be more prominent in FY25, extensive research indicates that Flink could boost Confluent Cloud spend by 15% to 35% in FY24. Additionally, the growing adoption of AI chatbots, which require reduced latency for real-time data processing, further enhances Flink’s near-term potential.
Confluent’s recent performance has been impacted by a few challenges, including some customers moving from cloud to on-prem environments and changes in their sales compensation model. However, these issues appear to be one-offs. The company’s new sales compensation model, which aligns sales reps’ incentives with company performance by basing their pay on consumption revenue rather than contract bookings, is expected to drive better alignment with customer interests and improve revenue recognition.
Moreover, Confluent’s competitive advantages and strategic initiatives position it well against rivals like Amazon Web Services (AWS), Google Cloud, and Microsoft’s Azure. Confluent’s managed Kafka offering provides significant Total Cost of Ownership (TCO) savings and better performance compared to open-source Kafka deployments, making it an attractive choice for businesses. The company’s penetration of the open-source Kafka installed base remains low, providing substantial growth opportunities. Additionally, Confluent has been gaining market share against hyperscalers’ managed Kafka offerings due to its superior feature set and performance.
Financially, Confluent trades at a discount compared to its peers. The stock, currently about 98% off its trailing twelve-month highs, trades at a multiple of ~7.5x CY25 revenues, a significant discount to the ~10.5x average multiple of its consumption model infrastructure software peer group. With relatively high short interest at 10%, there is considerable room for the stock to re-rate as Confluent executes its growth strategies.
Despite intense competition and its current lack of profitability, Confluent’s focus on continuous innovation, strong partner ecosystem, and dedication to open-source technology have helped it maintain leadership in the streaming data market. The company has shown strong growth, improving key metrics such as revenue, cloud revenue, remaining performance obligations, and operating margin.
In conclusion, Confluent’s innovative technology, strategic positioning, and financial potential make it a compelling investment. As businesses increasingly rely on real-time data streaming for competitive advantage, Confluent’s solutions are poised to become indispensable. With its discounted stock price and strong growth prospects, Confluent offers significant upside for investors willing to bet on the future of data streaming and real-time analytics.
CFLT is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 37 hedge fund portfolios held CFLT at the end of the first quarter which was 43 in the previous quarter. While we acknowledge the potential of CFLT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as CFLT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.