Investing in technology stocks has not been easy in 2022. A company losing half of its value would’ve been a sign of severe fundamental issues about a year ago, but now, it’s a reflection of a very difficult economic environment that has shattered investors’ confidence.
With inflation soaring and interest rates on the rise, consumers have less spending power, and many businesses are experiencing slower growth. But that’s not true for all of them — some companies make money by serving other businesses rather than consumers, and they’ve been a relative bright spot this year.
Confluent (CFLT) is one of them. Its stock has declined 76% from its all-time high, but the data specialist has raised its 2022 full-year revenue guidance not once but twice. That means this could be a buying opportunity, especially for the long term. Here’s why.
Confluent is the future of data streaming
Apache Kafka is a free, open-source data streaming platform used by 80% of Fortune 100 companies, and Confluent’s platform is designed to simplify, expand, and scale it. Data streaming is an area of growing demand, because it has a long list of applications for both the consumer experience and for improving business efficiency.
As cloud-computing technology grows in prominence, companies are able to deliver instant, live experiences to consumers on their digital devices. Take a sports-betting agency, for example, which has to rapidly calculate and deliver live odds to its customers. Doing so in a matter of seconds can be the difference between that customer placing a bet or walking away from the platform. That’s a use-case example for data streaming, and Confluent is the technology that makes it happen.
Amway, which is the largest direct-selling company in the world, has avoided millions of dollars in cost overruns by using Confluent to keep data moving. Rather than storing information and processing it batch by batch, Amway now streams data in real time, which allows the business to pivot much more quickly, saving money and boosting revenue.
Data is being generated with every single interaction a customer has with a company’s digital ecosystem. The more quickly the company can use the information to extract valuable insights, the more efficient its operations will be.
Confluent is defying the economic weakness
Many high-growth technology companies have been slashing their sales guidance this year amid the slowing economy. But Confluent has actually raised its 2022 full-year revenue projections twice, and it now expects to generate $569 million (at the midpoint). If it hits the mark, it will have grown its top line at a lightning-quick compound annual rate of 56% since 2019.
Much of the growth is being driven by Confluent’s highest-spending customers. In the second quarter, 857 of them generated $100,000 in annual recurring revenue, while 107 were spending at least $1 million. Those two cohorts grew 39% and 53% year over year, respectively.
The result was an 81% increase in Confluent’s remaining performance obligations (RPOs) to $591 million, and since RPOs are eventually expected to convert into revenue, it implies the company’s run of sales growth still has plenty of momentum.
Why Confluent stock is a buy on the dip
Investors have been reluctant to support unprofitable technology companies this year, because rising interest rates are driving the cost of capital much higher. Growth is the one bargaining chip most loss-making tech businesses have; investors sometimes accept operating losses with the expectation that the company will quickly acquire customers and turn a profit in the future. When that growth begins to slow, those investors often head for the exits.
It’s one reason Confluent stock has shed three-fourths of its value since late last year. The company posted a net loss of $231 million in the first six months of 2022, which followed a $343 million loss for the whole of 2021.
But Confluent’s saving grace is that it’s still growing incredibly quickly. And its dollar-based net retention rate of 130% implies each customer it acquires could be 30% more valuable with each passing year, which supports its continued investment in growth.
Plus, the company has almost $2 billion in cash, equivalents, and marketable securities on its balance sheet, so it can afford to run at a loss for the foreseeable future before eventually prioritizing profitability.
But most importantly, the demand for Confluent’s data-streaming services will only expand as consumers and businesses seek more real-time experiences. That alone might be enough to support Confluent stock over the long term, especially if it continues to attract high-spending customers at the current rate.
— Anthony DiPizio
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Source: The Motley Fool