Another look at Confluent (CFLT)

Investment Analysis Clubs Saul’s Investing Discussions
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wpr101 - I have also taken another look at Confluence, and I agree with many of the positives that you raise.

My “bullish case” for Confluent is the combination of the following factors:

  • Decent top-line growth (~40% YoY, expected to stabilize in the mid-30%'s in subsequent quarters

  • Its key product (Confluent Cloud) still growing high (102% YoY) and becoming a higher share of total revenue (41% compared to 28% in Q4’22)

  • A relatively small revenue base (~$700ARR), allowing for the possibility of acceleration before law of large numbers hits

  • A commitment towards profitability, with an indication of + non-gaap OpMargin by Q4’23 (from -22% in Q4’22)

So, to your point, there’s definitely room for excitement if this scenario plays out - especially at its current valuation.

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However, there are some amber flags that I’m closely paying attention to:
(1) While revenue growth hasn’t slowed as rapidly as other usage-based companies as you indicated, there is definite weakness showing up on forward indicators:

  • RPO has slowed to 48% YoY after growing at 91% Q4’22
  • Customer growth shows a similar pattern, with way less “paying customers” added in '23 than '22

(2) There have been compelling arguments made by @PaulWBryant , @stocknovice , @wsm007 and others regarding the cannibalization of revenue from Confluent Cloud to its Platform revenue, and the dependence on large customers to fuel its growth. In my opinion, these concerns are still valid - and with the added complication of today’s macro environment, I don’t think these questions will become apparent anytime soon

Confluent (CFLT) Result - Investment Analysis Clubs / Saul’s Investing Discussions - Motley Fool Community

(3) Lastly, while I can definitely see the growth in “data streaming” long term, the hyperscalers do offer similar tools to resolve use cases applicable for Confluent (i.e., AWS Kinesis). The techies here may rightfully correct me that these are not the same products; however, I have witnessed my client choose the hyperscalers’ products over Confluent. Adding the fact that Kafka is an open-source product, the “business imperative” for continued growth in this difficult environment becomes cloudy to me.

Oh, and for anyone that cares about the most contentious metric (SBC), it’s at 45% of revenue.

Closely monitoring,
-RMTZP

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