Shares of Confluent (CFLT) have begun to rebound following a one-day plunge of 42% at the start of November caused by a Q4 revenue outlook that missed the consensus estimate and an initial 2024 top-line growth forecast that fell short of expectations.
Recently trading at $22.41, the stock has rallied 52% from the new post-IPO low of $14.69 reached on November 2, although it’s still well below the 52-week high of $41.22. The provider of a real-time data streaming platform went public in June 2021 at $36 a share.
Confluent actually delivered a pretty solid Q3 report. Total revenue of $200.2 million gained 32% and topped the consensus of $195.4 million. Subscription revenue of $189.3 million was up 36%, with the platform revenue portion showing accelerated growth of 19% versus Q2 growth of 16%. Gross margin jumped 540 basis points year over year to 76.4%. Confluent reported earnings of two cents a share, topping the consensus by two cents.
Confluent Cloud revenue of $91.6 million slightly missed the outlook of $92.2 million, but still showed strong growth of 61%. The consumption-based cloud business is Confluent’s main growth driver and also sports a dollar-based retention rate above 130%. The cloud is steadily growing in importance—it now represents 46% of total revenue, up from 44% in the previous quarter and 38% a year ago.
The main reason for the harsh sell-off in Confluent shares was a slowdown in new cloud revenue caused by organizations reining in consumption due to macro uncertainty. In Q2, Confluent added $9.9 million in cloud revenue on a sequential basis. After adding $8 million of new cloud revenue in Q3, Confluent guided to a Q4 addition of around $6.2 million. This resulted in the company offering a Q4 total revenue outlook that was 3.8% below the consensus.
On the Q3 earnings call, Confluent management called out a challenging spending environment, which is hurting organic consumption and causing a slowdown in new use cases for real-time data streaming. Two large customers will account for about half of the expected Q4 consumption shortfall. One of the customers moved workloads back to its own datacenter to cut costs, while the other customer slowed consumption ahead of being acquired.
With macro headwinds showing no signs of easing, Confluent management thought it was prudent to issue a conservative initial outlook for next year. The company’s 2024 total revenue growth forecast of 22% (down from estimated 2023 growth of 31%) missed the consensus growth estimate of 28%.
Part of the cautiousness for next year is tied to a change in go-to-market operations that may cause some disruption in sales execution over at least the next few quarters. Going forward, 100% of a sales rep’s cloud compensation will be based on incremental consumption and new logo acquisition versus 10% to 15% previously. For reps, the new goal is to bring in cloud revenue rather than new bookings or committed spend. Confluent will keep the vast majority of customer revenue under committed contracts. However, it won’t attempt to get commitments ahead of usage, meaning committed amounts will now be fully customer-driven.
Wall Street is mixed on Confluent following the guide-down. There were a lot of price target cuts and some downgrades. BofA downgraded Confluent to ‘Underperform’ because it thinks the accelerated transition to a consumption go-to-market model could weigh on growth for at least a full year. Truist lowered its target to $27 from $42, calling out macro headwinds and the shift in sales compensation. JMP Securities trimmed its target to $25, but still likes the story, as Confluent offers the leading commercial solution to store and process real-time data feeds.
Mizuho maintained its ‘Buy’ rating because it continues to expect data streaming adoption to expand over the medium-term and views the company’s platform as best-in-class. Wolfe Research upgraded Confluent to ‘Buy,’ saying the sharp drop in the stock price reset investor expectations ahead of an anticipated improvement in the business in 2025. The firm believes Confluent’s underlying fundamentals remain unchanged.
Guggenheim upgraded Confluent to ‘Buy’ with a target of $23. The firm argues that the company is “structurally sound” and is convinced that Confluent represents a “transformative technology” that has become an integral part of the modern tech stack. Guggenheim also called out the reduced valuation. At recent prices, the enterprise value is 6.5 times the 2024 consensus revenue estimate of $940.3 million.
In late November, Bernstein initiated Confluent at ‘Outperform’ with a price target of $34, saying it views the company as an attractive revenue story, with tailwinds from cloud adoption and a durable competitive position relative to hyperscalers and new entrants.
Bernstein notes that Confluent is the leading offering for self-hosted and managed Kafka, the dominant open-source standard for real-time data streaming. As the leading contributor to Kafka, the firm argues that Confluent has a durable advantage—it’s the most complete and forward-looking vendor, with high-performing and robust proprietary add-ons versus new entrants. Plus, Bernstein sees Confluent’s hosted offering as an attractive “Switzerland” product compared to the hyperscalers.
For 2024 and 2025, Bernstein is modeling mid-30% revenue growth, well above consensus estimates. This upside versus the consensus reflects the firm’s more upbeat cloud expectations and the belief that the Q3 idiosyncratic customer behavior will dissipate in the coming year.
Bernstein says Confluent’s growth has historically had a strong correlation to overall cloud growth, which could begin to reaccelerate next year. The firm believes Confluent can continue to build market share over the long-term and estimates nearly $6 billion of total ARR by the end of 2030.
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