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Shares of Confluent (NASDAQ: CFLT) 2024 started on a positive note. In the first two months of 2024, they are up almost 50%. But things have been going downhill for the data streaming provider since then, as it is down 36% from its year-to-date high.
Confluent shares have fallen this year and are underperforming Technology sector Nasdaq-100 index. The stock took another hit after announcing its second-quarter results on July 31, falling 18% in one session.
However, a closer look at Confluent’s quarterly performance and the end-market opportunities the company is in suggest this is a buy tech stocks could be a smart move in the longer term.
Confluent is growing steadily despite headwinds
Confluent reported second-quarter revenue of $235 million, up 24% year over year and exceeding management expectations of $229 million to $230 million. The company also reported adjusted earnings of $0.06 per share, also ahead of guidance from $0.04 per share to $0.05 per share.
The company offers a cloud-based data streaming platform that allows customers to connect and process their data streams in real time. This conflicts with the traditional method of storing data at rest in silos and later processing it in batches.
However, customers using Confluent’s real-time platform get more value from their data for a variety of applications, such as dynamic pricing, shipment tracking, customer service, IoT and artificial intelligenceamong others. Management estimates that the total addressable market was worth an estimated $60 billion in 2022 and could grow to an estimated $100 billion by 2025.
So the company is early in tapping into this huge revenue opportunity, as analysts expect full-year revenue to reach $955 million this year, up 23%. More importantly, Confluent has built a robust customer base and also captured a larger share of their wallets, even in what management describes in the earnings report as “a persistently volatile macro environment.”
This is evident from the fact that the total customer base grew by 13% year on year to 5,440. However, the number of customers with annual recurring revenue (ARR) greater than $1 million increased at a faster pace of 20%. Meanwhile, customers with more than $100,000 in ARR rose 14%.
Confluent’s ARR refers to the amount of contractually committed revenue it will receive from its platform customers over the next twelve months. It also refers to the revenue Confluent expects to generate in the coming year from customers using its cloud solutions, based on their usage over the past three months. So, the increase in ARR from its larger customers bodes well for the company as it points to a healthier revenue pipeline.
The improved customer spending also ensures margin gains for Confluent. The company reported a non-GAAP operating margin of 1% in the second quarter, compared to a negative 9% in the same period a year ago. Overall, Confluent can improve both revenue and earnings going forward, and that should support the stock in the long term.
Healthy profits in sight
Confluent expects 2024 earnings to be $0.20 per share. That would be a huge improvement over the non-GAAP earnings of $0.04 per share it reported in 2023. More importantly, analysts also forecast significant acceleration in corporate earnings in 2025 and 2026, despite downward revisions to their estimates recently.
Such excellent earnings growth should deliver strong returns for Confluent. Therefore, investors looking to add a growth stock to their portfolio should consider buying this stock before the stock recovers from its recent sell-off.
Should you invest $1,000 in Confluent now?
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Hard Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in Confluent and recommends Confluent. The Motley Fool has one disclosure policy.
1 Growth Stock Dropped 36% to Buy Hand Over Fist Before It’s Too Late was originally published by The Motley Fool