Confluent Stock: A Metaverse Big Data Play

Short-term stock price movements are nothing but noise, yet human emotion means we can’t help but check our portfolios every five minutes during market open. You’d think mainstream pundits would discourage such behavior, but they do anything but. Just look at this gem from Jim Cramer several days ago (our emphasis in bold).

A year ago, Cramer said investors were willing to pay up for Okta’s strong revenue growth even as the company remained unprofitable. However, now money managers are reacting to high inflation readings and preparing for likely interest rate hikes from the Federal Reserve, Cramer said.

Cramer said that shift helps explain why Okta shares are down 4% over the past five days, while Deere is up 6.2% in that same stretch.

Attributing significance to a +2.2% difference between two stocks over five days is why Cramer makes the big bucks. It’s also why people with a modicum of intelligence are getting increasingly turned off by mainstream financial pundits who ascribe credibility to this drivel.

Investing in quality companies with a lengthy time horizon means you’ll be well suited to weather market turmoil and sleep well at night in the process. Today, we’re going to talk about a company that provides a pick-and-shovel play on the metaverse – Confluent Inc (CFLT) – with their event streaming platform that analyzes data in motion providing insights at the speed of business. If you’re a venture capitalist, this is the sort of business you dream about backing.

  • September 2014: Confluent founded by Jay Kreps, Jun Rao, and Neha Narkhede
  • December 2017: First customer over $1.0 million in ARR
  • April 2019: Exceeded $100 million in ARR
  • March 2020: Exceeded 1,000 customers
  • March 2021: Exceeded 2,500 customers

About Confluent Stock

To come up to speed on this story, you’ll first need to read our piece on the success of Apache Kafka, a platform that processes and analyzes streaming data in real-time. Then, you’ll want to read our piece on Investing in The Metaverse with Event Streaming which talks about how all the data exhaust from the enterprise metaverse will need to be analyzed rapidly for insights. Confluent’s platform processes data in real-time while crossing over several technology segments such that Gartner hasn’t been able to classify them in any particular Magic Quadrant. Here’s how Confluent describes their competitive position in event streaming.

Infographic about the event streaming landscape 2021. Credit: Kai Waehner
Credit: Kai Waehner

Our belief is that Confluent’s opensource pedigree gives them the upper hand when it comes to selling their event streaming solution. Today, we’re going to look at some metrics that can be used to measure the health of their SaaS business.

Ingographic showing data in motion. Credit: Confluent
Credit: Confluent

How Confluent Makes Money

We can start by dividing Confluent’s “data in motion” offering into two parts:

  • Confluent Platform – an enterprise-ready, self-managed software offering that can be deployed in on-premise, private cloud, or public cloud environments. Subscriptions primarily have one-year terms.
  • Confluent Cloud – a fully-managed, cloud-native software-as-aservice (SaaS) offering available on all leading cloud providers. Pay-as-you-go, or under a usage-based minimum commitment contract of at least one year. Majority is usage-based.

The below metrics from Confluent’s latest 10-Q provide insights into how the business makes money and the segments they’re dabbling in. Just over a third of revenues come from outside the United States, and their recent introduction of a cloud platform is experiencing strong growth, now representing over a quarter of revenues.

Metrics from Confluent's latest 10-Q provide insights into how the business makes money and the segments they're dabbling in.
Credit: Confluent

Confluent describes their primary competition, especially for on-premise, as “internal IT teams that develop data infrastructure software using open source software, including Apache Kafka.” Any CTO making a build vs. buy decision will always lean towards buy, especially when the solution is widely respected by the industry. “Nobody ever got fired for buying IBM” as the old saying goes. Confluent’s competitors in the cloud are the well-established public cloud providers that compete in all their markets. This highlights the importance of our belief that developers will opt to purchase solutions from the creators of opensource Apache Kafka versus one of the evil empires such as Microsoft, Google, or Amazon.

Another important assumption we’re making is that Confluent’s solution isn’t a “nice to have” once it’s been implemented. Real-time data insights are used for rapid decision-making, and those needs don’t evaporate in times of economic turmoil. Consequently, we’re less concerned about the shorter contract durations of one year or the pay-as-you-go billing option which encourages new customers to kick the tires without any commitment. Whether subscription growth comes from the cloud or on-premise implementations doesn’t seem to matter much either since developers who utilize the platform will adopt it in the manner in which they see fit. Monitoring the growth of subscription revenues going forward seems sufficient, and that growth has been consistently steady over time.

Bar chart showing Confluent's Quarterly Revenue growth. Credit: Nanalyze
Credit: Nanalyze

If revenue growth starts slowing, we can then dig into the underlying segments to look for the cause. Inevitably this will happen, the market will panic, and there will be a decent buying opportunity as a result.

The usual SaaS metrics should also be monitored for Confluent. Of their +3,000 customers, 644 were paying over $100,000 in annual run rate (ARR) as of Q3-2021, up from 449 in Q3-2020. Around 74 customers are paying more than $1 million in ARR with net retention (the ability to upsell existing customers) sitting at around 130%. Users of this industry-agnostic data solution include 136 of the Fortune 500 companies who contribute approximately 35% of revenues.

Some notable reference customers - Credit: Confluent
Some notable reference customers – Credit: Confluent

A strong stable of reference customers makes selling an enterprise software solution to new customers much easier.

Should You Buy Confluent Stock?

We can’t tell you what to do with your money because we don’t give financial advice. We can tell you we went long Confluent when shares dipped below a simple valuation ratio of 40. (Nanalyze Premium annual members were the first to know.) Confluent shares didn’t stay there for long, but as they dip, we’ll slowly continue adding. Here’s where the valuation ratio sits today.

  • Market capitalization / annualized revenues
    17,750 / 410 = 43

A reader recently asked why we chose the number 40 as our cutoff. We chose 40 because it’s a round number that’s easy to remember and – based on our experience so far – seems to be right around that point when stocks seem to be more hype than substance. Another reader suggested that we might adjust the number as time goes on based on our sentiments towards the market which is also an interesting idea. Regardless of what number you use, having a cutoff number is what’s important because it keeps you from investing in overpriced stories. Also note that this rule incidentally keeps us from investing in companies with no revenues as well.

As mentioned before, the Confluent IPO somehow slipped past our monitoring process otherwise we might have invested in CFLT stock sooner. Companies like Snowflake are just too overvalued, so we’ve been on the hunt for a way to play the growth of big data exhaust, particularly as enterprises look to turn their businesses into digital twins that live in the enterprise metaverse.

Conclusion

Confluent represents an opportunity to play the big data theme without paying exorbitant valuations for companies like Snowflake. Given how widely used Apache Kafka is, and the allegiance that developers often have towards opensource solutions, we would expect that Confluence will have an easier time closing deals and retaining customers over time. Revenue growth is a proxy for market share captured and that’s the metric we’re paying the most attention to right now.

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12 thoughts on “Confluent Stock: A Metaverse Big Data Play
  1. what’s your opinion on Palantir vs Confluent? Do you think Confluent is better positioned in the big data field?

    1. That’s a tough question to answer without really digging into both platforms. The first question to answer would be to what extent these companies compete with one another, if they even do. Even if they were direct competitors, the TAM could be so big that their paths never cross. We’ll pass your question on to our research team and see if they can craft it into a future piece.

    1. The article does mention Confluent competes with all major cloud providers:

      Confluent’s competitors in the cloud are the well-established public cloud providers that compete in all their markets. This highlights the importance of our belief that developers will opt to purchase solutions from the creators of opensource Apache Kafka versus one of the evil empires such as Microsoft, Google, or Amazon.

      We are betting that allegiance to the opensource community trumps the big cloud providers because we’ve seen that happen so often before. We could be wrong.

  2. Hi and thanks for reply

    This is true that Amazon is mentioned. I was thinking it meant Amazon kinetik as that is clearly shown in picture but now I see Amazon MSK there also in patrially managed segment. The pic resolution is so low that one cannot see well but now I recognize the MSK brand symbol is there.

    The picture gives impression that Confluent is only fully managed native Kafka service providor.

    Behind the link they say it is fully managed.

    So my question now is that should Amazon MSK be in a same segment with Confluent as a fully managed native Kafka? If it should then the pic gives not true info.

    1. Good point on the pic resolution. We couldn’t actually get it anymore high-res and we even doctored it quite a bit just to make it that legible.

      A fellow over at Confluent – Kai Waehner – put that diagram together. The content he publishes on his blog is exceptional from what we’ve read so we imagine he would have thought that through. He probably did given Confluent published a piece on the topic here: https://www.confluent.io/resources/confluent-cloud-vs-amazon-msk

      That brief gets technically complex in a hurry so be forewarned.

  3. I just came across Fobi AI (TSX-V:FOBI, OTCQB:FOBIF), a Canada-based data intelligence company. The Company uses artificial intelligence to help clients turn real-time data into actionable insights and personalized customer engagement. Fobi’s Internet of things (IoT) device can integrate into existing infrastructure to enable data connectivity across online and on-premise platforms creating solutions for its global clients.

    1. They’re just too small to be on our radar. We would not advise that risk-averse investors dabble in anything with a market cap of less than $1 billion. And they have no meaningful revenues? This is a huge no from where we’re sitting.

  4. Confluent is -10% today pre-market. Yesterday they had earning day.
    Revenue of $119.9M (-54.2% Y/Y) beats by $10.1M.
    For FY2022, the company expects revenue in the range of $538M to $546M and adjusted EPS of -$0.82 to -$0.74.

    1. Confluent must feel like the boyfriend who gets a reservation at a really popular restaurant on Valentine’s Day – calls in advance for a top-shelf bottle of champagne on ice, makes sure there’s things she likes on the menu, asks for the best table in the house. Then the big day comes, she’s upset. What honey? What’s wrong? “I was hoping you would have taken me to the restaurant we went to on our first date,” she says with that pouty frown on her face.

      It’s hard to see what Confluent did wrong to merit a 20% drop in share price, which means anyone who is buying should be really happy right now.

  5. Confluent is down 82% from its height. Right now it looks like a possible bargain. Share price: $18.3.
    Market cap = $5B. They have $2B in cash. Cash burn rate: $55M last quarter.
    So it seems they could go for many years without needing to raise money (if they don’t make acquisitions).

    1. Good observation here. Analyzing data in real-time certainly seems like the way forward and they seem well positioned to weather any storm coming. Looks like we’re close to maxing out our capital on this position but may look to top off one of these days.

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