Confluent Has Big Potential in Cloud Expansion and Flink Launch, Analyst Gives A Thumbs Up

Stifel analyst Brad Reback initiated coverage on Confluent Inc CFLT with a Buy rating and a price target of $40.

Confluent has a significant opportunity in the Fortune 500, with over 75% of these enterprises already using Apache Kafka, and only 36% are currently Confluent customers, Reback noted. 

Beyond that, management estimates over 150K organizations using Kafka compared to only ~5,000 paying Confluent customers. 

The analyst expects organizations to increasingly turn to Confluent to standardize, optimize, and fortify their data streaming architecture.

Confluent has embraced the market’s fully managed cloud service segment as customers of all sizes are moving away from self-managed products, given the operational overhead needed to support these solutions. 

Confluent Cloud is now 47% of total revenue, and the company has set out long-term goals of 80% mix from cloud, Reback stated. 

As per the analyst, the company’s upcoming Flink product and FedRamp approvals should serve as additional catalysts for cloud growth.

The fully managed Flink offering has the potential to meaningfully augment Confluent’s top-line growth rate in the coming years as new and existing customers embrace the Flink product to enhance their respective real-time data architectures.

Reback expects the company to continue progressing towards its medium-term model target of 5-10% operating margin. 

However, expect near-term progress to be more modest as management invests to ramp up its Flink product and the GTM compensation structure transition creates some productivity disruption.

Reback noted Confluent, at the center of the data streaming software community, is well positioned to benefit from the enterprise shift towards its managed Kafka and Flink offerings given the ease of use, reliability, and cost efficiencies. 

This tailwind and the company’s successful ongoing migration of customers to the cloud and the associated reduced friction in adopting new products should enable Confluent to sustain healthy 20%+ growth and drive margin expansion over the coming years.

Reback projects first-quarter revenue and EPS of $211.5 million (versus consensus $212.2 million) and $0.02 (in line with the consensus).

Price Action: CFLT shares traded lower by 0.93% at $32.42 on the last check Wednesday.

Also Read: Confluent Analysts Boost Their Forecasts After Upbeat Earnings

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