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E-commerce websites, sports betting apps, and even stock trading platforms constantly feed real-time data to their users to create live experiences. That requires a specialized technology called data streaming, and Confluent(NASDAQ: CFLT) is an industry-leading provider.
Demand for data streaming is only going to grow over time, especially as more businesses adopt artificial intelligence (AI), which is a brand-new opportunity for the industry. In fact, Confluent believes its addressable market could hit $100 billion next year, and based on the company's current revenue, it has barely scratched the surface of that opportunity.
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Confluent stock is trading 72% below its all-time high, which was set during the tech-frenzy in 2021. It was relatively overvalued back then, but the majority of the analysts tracked by The Wall Street Journal have now assigned it the highest-possible buy rating. Here's why investors might want to follow their lead.
Image source: Getty Images.
AI will expand the scope of the data streaming industry
Data streaming might sound complex, but here's a simple analogy: Many years ago, consumers would visit a video store to rent a movie, and they would go home and watch it using their DVD player. Video streaming platforms like Netflix have eliminated all of that hardware by using the internet to "beam" movies directly to your television on demand.
Data streaming is conceptually similar. Years ago, businesses would store their valuable data on physical, on-premise servers, and they would come back to analyze it at a later date. Today, businesses store their data in centralized data centers instead (which are managed by tech giants like Amazon) for a fraction of the cost. Data streaming technology allows them to ingest, process, and analyze their data in real time.
It has a number of use-cases which I highlighted earlier. Retail giant Walmart, for example, uses Confluent to connect its physical and online stores so it can track its inventory in real time. Whenever a product is sold at any location, that inventory information is instantly updated. That means when Walmart shows a product as "in stock" on its online store, customers can feel confident it's true.
Data streaming is also critical in the world of AI, because applications like chat bots and virtual assistants need to instantly ingest, analyze, and interpret user prompts and then output accurate responses. With Confluent, companies can tap into their real-time data streams and integrate them with large language models (LLMs) from leading start-ups like OpenAI to create unique AI applications.
Here's a practical example. A chat bot like ChatGPT can probably tell you how much it costs to bring a surfboard on a plane, because that information is readily available on the internet. However, it can't give you any specific information about your flight (like whether it might be delayed).
An airline can use Confluent to create data pipelines containing real-time information about all of its flights and passengers, and plug them directly into an AI chat bot on its website. That would allow passengers to access everything they'd like to know with a simple prompt. It could also save the airline a ton of money because it reduces the need for human customer service staff.
Confluent is delivering solid revenue growth
Confluent generated $250.2 million in total revenue during the third quarter of 2024 (ended Sept. 30), which was a 25% increase from the year-ago period. That marked an acceleration from the second quarter, when revenue grew by 24%.
It also places the company on track to achieve $1 billion in annual revenue on a forward basis for the first time ever. That's a key milestone, but as I highlighted at the top, it's a mere fraction of what could be a $100 billion opportunity in 2025.
Two things contributed to the strong Q3 result. First, Confluent's net revenue retention rate was 117%, meaning existing customers were spending 17% more money than they were during the same period last year. Second, the company had a strong quarter of customer acquisition.
Confluent was serving 5,680 total business customers at the end of Q3, which was a 16% increase from the year-ago period. That included 1,346 customers who were spending at least $100,000 per year, and 184 customers who were spending at least $1 million per year. Those figures were up 14% and 19%, respectively.
Confluent could see even further strength in the $1 million-plus cohort in the near future as technologies like AI become more embedded in large organizations.
Wall Street is bullish on Confluent stock
The Wall Street Journal tracks 34 analysts who cover Confluent stock, and 22 of them have given it the highest possible buy rating. Four more are in the overweight (bullish) camp, and seven recommend holding. Although one analyst has assigned Confluent an underweight (bearish) rating, no analysts recommend outright selling.
Confluent stock might be down 72% from its peak in 2021, but the company has consistently grown its revenue every year since then, which has resulted in a very attractive valuation.
The stock trades at a price to sales (P/S) ratio of just 9.1, which is close to the cheapest level since the company went public three years ago. That P/S ratio is also 48% below its average of 17.5:
CFLT PS Ratio Chart
Based on the combination of Confluent's valuation, solid revenue growth, enormous addressable opportunity, and Wall Street's bullish consensus, now might be a great time for investors to buy the stock.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Netflix, and Walmart. The Motley Fool recommends Confluent. The Motley Fool has a disclosure policy.
