An Annual Checkup for Confluent Stock

Checking in with shares yearly eliminates plenty of the noise present in quarterly outcomes. It’s additionally lengthy sufficient so that you just solely keep in mind probably the most primary the explanation why you made the funding within the first place. We invested in Confluent (CFLT) as a result of the way forward for large information will likely be companies analyzing it in actual time for insights and higher decision-making. Time is cash. Lengthy gone are the times of multi-day extract-transform-load processes feeding a knowledge warehouse which then will get queried by information analysts who obtain requests from enterprise decision-makers. These days, information exhaust informs processes on the pace of enterprise.

IDC predicts that by 2025, occasion streaming applied sciences will likely be utilized by 90% of the International 1000 to ship real-time intelligence to enhance outcomes akin to buyer expertise.

Credit score: Confluent

Simply over a 12 months in the past, we wrote about Confluent Inventory: A Metaverse Massive Knowledge Play and bemoaned the wealthy easy valuation ratio of 43. At this time, that’s dropped to 10, which remains to be above our catalog common of six, however extra in step with different high-growth SaaS companies.

Checking in With Confluent

The one two causes we’d promote a tech inventory we’re holding are if income development stalls or our thesis modifications. Due to this fact, anticipating why income development may stall is useful. With each firm on the market speaking about “macroeconomic headwinds,” we’d anticipate development to stall for Confluent as properly, however that hasn’t occurred but. Under in inexperienced, you’ll be able to see the income development since our final article, and in pink, you’ll see our estimates for the 30% development Confluent expects in 2023.

The current earnings name talks about “elongated deal cycles with clients” and the way “elevated scrutiny continues to exert stress on massive offers and new enterprise.” Because of this, they’ve “taken steps to regulate our value construction, to speed up our time to profitability by one 12 months, whereas nonetheless sustaining roughly 30% income development.” After trimming 8% of their workforce and decreasing their actual property footprint, Confluent anticipates arriving at profitability a 12 months earlier.

With $2 billion in money and marketable securities available, there’s probably a possibility for Confluent to broaden by acquisition. Final month, they acquired a pre-revenue agency Immerok which compliments their core product – Kafka – within the method described beneath.

• Confluent’s Kafka the usual for studying, writing, and sharing streams throughout a corporation,
• Immerok’s Flink is on a trajectory to be the usual for constructing purposes that course of, react, and reply to these streams.

Administration’s feedback have been that this acquisition was very complementary, and – maybe after a number of years of growth and funding – may rival their product platform right now by way of potential.

One other factor to notice from the current earnings name was point out of the gross retention charge (cancels) being above 90%.

Gross retention charge remained robust and was above 90%, reflecting the power of our product differentiation and TCO benefits towards various options, together with open supply Kafka.

Credit score: Confluent This fall-2022 earnings name

In a worst-case situation, that implies that solely 90% of their clients are sticking round when that quantity must be within the excessive 90s for a wholesome enterprise. Maybe that’s a superb segue into speaking in regards to the competitors.

Confluent’s Competitors

Conversations on our Discord server have probed what Confluent’s competitors appears like, specifically, Amazon and all the opposite main cloud suppliers who’re offering real-time information processing capabilities as properly.

We spent a while poring by commentary from Confluent’s International Subject CTO who’s fairly prolific in terms of describing his agency’s aggressive positioning. As a result of his viewers primarily consists of technically competent individuals, he can’t peddle the standard gross sales shite in terms of aggressive comparisons (one would hope, in any case). His perception is that Amazon’s providing isn’t as streamlined because it may very well be, which implies those that undertake it nonetheless must do a good quantity of labor (this additionally contains assist concerns). He additionally caveated the entire thing by saying that issues change extraordinarily quick, so take all of it with a grain of salt.

Word that Amazon and Confluent aren’t solely rivals however key companions (Amazon shoppers can use AWS credit to buy Confluent’s companies). Perhaps that’s as a result of shoppers who make the most of a number of cloud suppliers might search for a single real-time information evaluation vendor who offers an answer throughout all cloud suppliers. Maybe that’s the purpose Confluent is attempting to make on this diagram that popped up of their current investor deck.

If the market is as large as Confluent claims, then there must be room for multiple winner.

The $60 Billion TAM

Our current piece on distributed manufacturing highlighted a doable case the place the total addressable market (TAM) is probably not almost as large as traders have been promised. Once we’re speaking about blue ocean TAMs, the one factor stalling development can be a TAM that was incorrectly estimated, or robust aggressive pressures that stymie development. Confluent talks a couple of $60 billion TAM, and right here’s how they break that down:

• Symbolize 73% of the $50B utility infrastructure & middleware market
• Symbolize 10% of the $92B database administration market
• Symbolize 30% of the $32B analytics platform market
• Symbolize 50% of the $10B information administration market

Capturing 73% of the appliance infrastructure & middleware market seems like an extreme quantity except we’re assuming that the complete class strikes to real-time and Confluent captures 3/4 of the chance. If we simply went with 10% throughout every of those classes, that’s a good TAM of round $18 billion. Gartner’s MBAs then inform us that quantity will develop at a compound annual growth rate (CAGR) of 19% by 2025, so we arrive at $30 billion of which Confluent has captured round 2%. Sustaining management may give them a 30% market share which equates to $10 billion run charge. From that perspective, even when the TAM have been off by fairly a bit, Confluent nonetheless has plenty of alternative. Their money place may also afford the flexibility to make strategic acquisitions. Given the technical competence of the administration crew, it appears possible they’ll make the suitable selections.

One other option to calculate reasonable potential may lie in some serviette math. Round 70% of the Fortune 500 makes use of Kafka and our final article famous that 136 of the Fortune 500 corporations (or 27%) contributed roughly 35% of Confluent’s 2021 revenues – about $136 million or $1 million per firm. Confluent talks about “a rising variety of $10-million-plus ARR clients” which implies they need to be capable of notice at the least $1.36 billion in annual revenues simply by growing utilization throughout their current massive shoppers. When web retention begins to say no meaningfully, that can level to saturation of their current buyer base which must be accompanied by a slowdown in general development.

Our current piece on Discount Searching Software program-as-a-Service Shares talked in regards to the deserves of promoting corporations cloud-based options versus on-site options. Confluent’s development is predominantly coming from their cloud providing which may very well be displacing inner groups performing the identical features which implies it saves prices.

For the 70% of Fortune 500 corporations utilizing Kafka that aren’t shoppers of Confluent, there’s a possibility to economize and scale back complexity by adopting a cloud-based resolution versus inner IT groups that develop information infrastructure software program utilizing open-source software program. Supplied Confluent retains executing, the 30% income development they anticipate in 2023 ought to imply there’s not a lot to fret about within the face of no matter macroeconomic headwinds they encounter.

Conclusion

The expansion of massive information is indeniable, and it solely is sensible that the following step can be to cut back the time it takes to extract insights from it. The metaverse isn’t simply individuals socializing in Zuck’s new digital actuality world, it’s additionally all the things round us being rendered as a digital twin with IoT sensors offering a real-time image of what’s occurring. If corporations can function extra effectively by processing information in actual time, the capital outlay can simply be justified, and pilot initiatives must develop into full-scale deployments. An growing variety of clients spending greater than $10 million every year on Confluent is an indicator that giant enterprises can broaden their use instances considerably which bodes properly for the big TAM traders are being teased with.

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