Confluent Archives - Fountainheadinvesting

Confluent’s Excellent Quarter Is A Major Inflection Point

02/11/2025

Confluent (CFLT) $37 – Still worth buying.

I’ve owned it for over two years but will pyramid (add smaller quantities on a large base) it further.

Why is this company still worth investing in after a 20% post-earning bump?

Four important catalysts

Databricks partnership: The partnership with Databricka, which is much better known and valued increases brand awareness and opens a lot of new opportunities and doors.

This could accelerate growth from the current 22-23%.

Strong customer base: 90% of its revenues are coming from 100K + ARR clients.

The $1Mn+cohort saw the highest growth, and Confluent managed a net ARR of 117%, indicating strong upselling.

A changing data processing market: The entire batch processing model could be up for grabs – customers moving at the speed of light and willing to pay for the latest technology could be a huge TAM.

This is a paradigm shift, which Confluent has been trying to build into for a decade. 2025 might be that inflection year, with all the AI build-outs and use cases that are likely to need live processing – Confluent is the leader in that field. To be sure it’s not going to throw data processing models into obsolescence, why would you spend money on data that doesn’t need to be processed in real-time, but could take a large chunk of that market?

Snowflake acquiring RedPanda: Snowflake is reportedly trying to buy streaming competitor RedPanda for about 40x sales: While it’s not an obvious comparison, Red Panda is supposedly less than 10% of Confluent’s revenues but growing at 200-300%. But it’s the synergy with the larger data provider that’s getting it a massive price tag – Snowflake would love to have this arrow in its quiver of data tools.

Confluent is best positioned to take advantage of the possible shift from batch processing to processing in data streaming; its founders invented Apache Kafka, the open-source model for data streaming. And while its own invention is available for free – managing and maintaining it at scale needs the paid version. Over the years with the focus on Confluent Cloud, Confluent gets 90% of its $1Bn revenue from customers over $100K in annual revenue.

Confluent has the cash the tech chops and the focus – sure Apache Kafka is open source and many cloud service providers like AWS and Microsoft also provide enough competition, but no one has the product breadth that Confluent does.

I would not be surprised if Confluent’s multiple expands from the current 8x sales after this earnings call.

Here are the details of the December 2024, 4th quarter earnings:

Q4 Non-GAAP EPS of $0.09 beat by $0.03.
Revenue of $261.2Mn (+22.5% Y/Y) beat by $4.32Mn.
Q4 subscription revenue of $251Mn up 24% YoY
Confluent Cloud revenue of $138Mn up 38% YoY
2024 subscription revenue of $922Mn up 26% YoY
Confluent Cloud revenue of $492Mn up 41%YoY

1,381 customers with $100,000 or greater in ARR, up 12% YoY.
194 customers with $1Mn or greater in ARR, 23% YoY.

Financial Outlook

	Q1 2025 Outlook	FY 2025 Outlook
Subscription Revenue	$253-$254 million	$1.117-$1.121 billion
Non-GAAP Operating Margin	~3%	~6%
Non-GAAP Net Income Per Diluted Share	$0.06-$0.07 vs. consensus of $0.06	~$0.35 vs. consensus of $0.35

Confluent Stock Pops 25%: Why I’m Buying on Declines Despite the Earnings Surge

Confluent (CFLT) the stock popped 25% to $30 on great results and guidance.

My last few recommendations in the past two weeks, when the price was $24, was to buy up to $26, with a 1-year target of $28, with a return potential of over 25% in the next 3-5 years.

Wouldn’t advise trying to jump in over $30, there was a short interest of 11% yesterday, so that contributed a ton to the post-earnings pop, but given the performance, I will buy on declines – I still see annual gains over 20% from here – some of the gains have been pulled forward with this jump.

Here are my forward estimates:

3 Year Revenue growth expected 27% – Current P/S 9, drops to 5.6 by 2026,

3-Year Adjusted Earnings growth expected – Management has guided to adjusted operating break even in 2024, and post-2024, I expect at least 35% to 40% operating profit growth (analysts’ estimates are even higher).

Summary of 2023 earnings

Q4 Non-GAAP EPS of $0.09 beats by $0.04.

Revenue of $213M (+26.0% Y/Y) beats by $7.72M.

Fourth quarter subscription revenue of $203 million, up 31% year over year; fiscal year 2023 subscription revenue of $729 million, up 36% year over year
Fourth quarter Confluent Cloud revenue of $100 million, up 46% year over year; fiscal year 2023 Confluent Cloud revenue of $349 million, up 65% year over year
Confluent Crowd is their big growth catalyst
1,229 customers with $100,000 or greater in ARR, up 21% year over year
Q1- 2024, Confluent guidance:
Total revenue between $211 million and $212 million VS $210.54M consensus
Subscription revenue between $199 million to $200 million
Non-GAAP operating margin of approximately negative 4%
Non-GAAP net income per diluted share between $0.00 to $0.02 vs $0.02 consensus
Fiscal year 2024, Confluent guidance:
Total revenue of approximately $950 million $935.29M consensus;
Non-GAAP operating margin of approximately 0%
Non-GAAP net income per diluted share of approximately $0.17 vs $0.17 Consensus