Is Confluent a stock to watch in 2022?

Jconsider investing in Confluent (NASDAQ: CFLT) inventory in 2022? In this segment of Backstage passregistered on January 10goofy contributors Jamie Louko and Danny Vena discuss the fast-growing software-as-a-service (SaaS) stock and what potential investors need to know about the company’s innovative business model.

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Jamie Louko: I’m going to talk about Confluent. Simply put, their mission is to put data in motion. This basically means that with companies creating so much data these days, most of them just send their data throughput to a data warehouse, but with a lot of companies like, let’s take banks for example. Some of this data shows that there was potential fraud. They really need to realize that data in real time, and Confluent allows them to do that. There is an open source project called Apache Kafka.

It’s the kind of mastermind behind it all that allows companies to analyze their data in real time. But the problem with Kafka is that it’s really difficult to scale it and integrate it into an entire company. This is essentially what Confluent does. They run the entire Kafka service for enterprises and they basically extend it to their entire enterprise. As you can see in this bottom photo, they have some really big customers. Home deposit, Dominoes, netflix, Unity. They have a lot of very famous clients. 80% of the Fortune 100 use Kafka and 70% of the 500 use it.

There’s definitely a big pool of big business that Confluent can take on here. The main strength of Confluent is that the developers of Kafka, which is an open source and free solution, were also the founders of Confluent. Jay Kreps, who today is the CEO of Confluent. He was one of the developers of Kafka and he made it open-source, he made it free for everyone, but then realized the scaling issues and so, with the other two developers , he founded Confluent.

This has resulted in strong growth: 58% revenue growth for the last 12 months. Confluent Cloud, which is the cloud-based service for Confluent, grew 245% in Q3 and we can see that’s quite a small amount compared to total revenue.

Much of Confluent is on-premises software, but we can see it growing rapidly.

Since the fourth quarter of 2019, revenues have increased sequentially each quarter, with net retention rates very high at 130%. Their market is growing massively. It should almost double in just a few years.

Danny Vena: For those who may not be familiar with the net retention rate, it’s basically the same group of customers and they basically spent 30% more this year than they spent last year, is not it ?

Louco: Yes. Thanks, I should have clarified that.

Vein: No problem.

Louco: Thank you very much Danny. But like all other IPOs, it’s not profitable, it’s very expensive. I don’t like that they have negative free cash flow and that’s pretty substantial.

I’m not a fan of that. The other thing that’s been trending down lately for the last three or four quarters, and the gross margin has gone down.

It’s mainly because of the rapid growth of Confluent Cloud, which has a pretty low gross margin right now, but it’s seeing signs of rapid improvement as they scale, and just a few minutes , it’s Confluent.

Vein: Well, thank you for this detailed overview of Confluent. You know, this is a business that I have looked into and I still don’t quite understand the business well enough, in which I would be willing to invest my own money.

Danny Vena owns Netflix. Jamie Louko owns Confluent, Inc. and Domino’s Pizza. Rachel Warren has no position in the stocks mentioned. The Motley Fool owns and endorses Confluent, Inc., Domino’s Pizza, Home Depot, Netflix, and Unity Software Inc. The Motley Fool has a Disclosure Policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.