2 Reasons to Like CFLT (and 1 Not So Much)

What a fantastic six months it’s been for Confluent. Shares of the company have skyrocketed 52%, hitting $30.77. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now still a good time to buy CFLT? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.

Why Does CFLT Stock Spark Debate?

Built by the original creators of Apache Kafka, the popular open-source messaging system, Confluent (NASDAQ:CFLT) provides a data infrastructure platform that enables organizations to connect their applications, systems, and data layers around real-time data streams.

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 $338.2 million in Q4, and over the last four quarters, its year-on-year growth averaged 24.2%. 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. Wall Street Expects Impressive Revenue Gains

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 17.2%. While this projection is below its 22.5% annualized growth rate for the past two years, it is healthy and suggests the market sees success for its products and services.

One Reason to be Careful:

Operating Losses Sound the Alarms

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Confluent’s expensive cost structure has contributed to an average operating margin of negative 32.6% 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, and with the recent surge, the stock trades at 7.9× forward price-to-sales (or $30.77 per share). Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.

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