What a brutal six months it’s been for Confluent. The stock has dropped 24.6% and now trades at $24.48, rattling many shareholders. This might have investors contemplating their next move.
Following the pullback, is now the time to buy CFLT? Find out in our full research report, it’s free.
Why Does Confluent Spark Debate?
Started in 2014 by the team of engineers at LinkedIn who originally built it as an internal tool, Confluent (NASDAQ: CFLT) provides infrastructure software for organizations that makes it easy and fast to collect and move large amounts of data between different systems.
Two Things to Like:
1. Billings Surge, Boosting Cash On Hand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Confluent’s billings punched in at $267.3 million in Q1, and over the last four quarters, its year-on-year growth averaged 27.9%. This performance was fantastic, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth. 
2. Projected Revenue Growth Is Remarkable
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite, though some deceleration is natural as businesses become larger.
Over the next 12 months, sell-side analysts expect Confluent’s revenue to rise by 17.4%. While this projection is below its 32.5% annualized growth rate for the past three years, it is commendable and implies the market is baking in success for its products and services.
One Reason to be Careful:
Operating Losses Sound the Alarms
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Confluent’s expensive cost structure has contributed to an average operating margin of negative 40.2% over the last year. This happened because the company spent loads of money to capture market share. As seen in its fast revenue growth, the aggressive strategy has paid off so far, and Wall Street’s estimates suggest the party will continue. We tend to agree and believe the business has a good chance of reaching profitability upon scale.
Final Judgment
Confluent has huge potential even though it has some open questions. After the recent drawdown, the stock trades at 6.8× forward price-to-sales (or $24.48 per share). Is now a good time to initiate a position? See for yourself in our in-depth research report, it’s free.
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