On Friday, Bernstein SocGen Group updated its assessment of Confluent Inc (NASDAQ:CFLT) shares, reducing the price target to $33.00 from the previous $38.00 while maintaining an Outperform rating on the stock. The adjustment follows a recent analysis of the cloud software sector, which indicated potential headwinds for companies like Confluent.
The firm noted earlier this week that it had revised its expectations for cloud-related growth, affecting companies that rely on cloud infrastructure. The analyst pointed out that Confluent, known for its real-time data streaming platform, may face similar challenges to those outlined in the firm's recent Datadog (NASDAQ:DDOG) report.
These challenges include disruptions in demand due to generative AI and difficulties for non-tech enterprises in advancing their projects to production stages.
Despite these industry-wide challenges, Bernstein SocGen Group expects Confluent to narrowly beat its Q3 2024 subscription revenue target by less than 2%, a smaller margin than the more than 3% beats observed in the first two quarters of the year. The firm believes that Confluent will continue to secure new workloads and maintain consistent churn levels.
The analyst also highlighted the impact of Confluent's relatively small and concentrated customer base, which can lead to significant effects from individual company behaviors. While difficult to predict, the underlying data suggests revenue deceleration could bottom out by the end of the year.
Assuming the correlation with cloud market growth persists, the firm anticipates Confluent's growth could accelerate to the low-to-mid-30% range by the end of 2025, supported by easier comparisons from previous periods, and remain above 30% into 2026.
Bernstein SocGen Group expressed optimism about Confluent's potential to report the first subscription revenue beat and raise for the year, based on correlated cloud metrics. These indicators may also provide the company with enough visibility to justify revising its full-year or Q4 guidance upwards, in line with the expected beat for this quarter.
In other recent news, Confluent Inc. has been making significant strides in the data streaming market. The company reported a 27% increase in subscription revenue to $225 million and a 40% rise in Confluent Cloud revenue to $117 million.
Moreover, they added 320 new customers during this period. However, the net revenue retention of 118% fell slightly short of its target range. Financial services firm Stifel maintained its Buy rating on Confluent shares, citing the company's shift from open-source Kafka to Confluent as a promising development. TD Cowen also sustained a Buy rating, despite lowering its price target from $31 to $27.
Meanwhile, JPMorgan (NYSE:JPM) reiterated its Overweight rating, praising Confluent's ongoing organic innovation and strategic acquisitions, while Goldman Sachs (NYSE:GS) maintained a neutral stance, awaiting further evidence of Confluent's influence on customer AI strategies. These developments reflect the recent strategic and financial strides made by Confluent in the data streaming market.
InvestingPro Insights
To complement Bernstein SocGen Group's analysis, recent data from InvestingPro offers additional context on Confluent's financial position. Despite the challenges outlined in the report, InvestingPro Tips highlight that Confluent holds more cash than debt on its balance sheet and its liquid assets exceed short-term obligations. This strong liquidity position could provide a buffer as the company navigates the potential headwinds in the cloud software sector.
However, aligning with the firm's cautious outlook, InvestingPro data shows that Confluent is not profitable over the last twelve months, with an operating income margin of -44.94%. The company's revenue growth, while still robust at 26.55% over the last twelve months, has slowed to 24.14% in the most recent quarter, reflecting the deceleration mentioned in the analyst report.
InvestingPro Tips also indicate that Confluent is trading at a high revenue valuation multiple, which investors should consider in light of the revised growth expectations. Notably, analysts predict the company will be profitable this year, which could be a positive sign amidst the current challenges.
For readers seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for Confluent, providing a deeper understanding of the company's financial health and market position.
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