What Happened:
Shares of data infrastructure software company, Confluent (NASDAQ:CFLT) fell 27.1% in the morning session after the company reported third quarter earnings results, with revenue guidance for the next quarter falling below Wall Street's expectations. Additionally, the company experienced a decrease in its new large contract wins, citing a "challenging macroeconomic environment" as a contributing factor. Notably, the Confluent Cloud revenue, which accounts for approximately half of total revenues, did not meet the company's projections for the quarter. This was partly due to lower-than-expected cloud consumption among some significant U.S. digital native customers, with the impact becoming more pronounced in the latter part of Q3 and expected to continue into Q4 and the next year. Overall is was a worrisome quarter.
On a positive note, the company's revenue in the quarter surpassed Wall Street's expectations. It's also worth mentioning that Confluent made significant improvements in its gross margin during this period. Following the results, Bank of America downgraded the stock's rating from Neutral to Underperform and lowered the price target from $38 to $24. The firm cited challenges such as macroeconomic pressures, an accelerated transition to cloud consumption deals, and specific headwinds affecting Confluent's growth, particularly its exposure to Israel's spending pullback and a transition to a new sales compensation model.
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What is the market telling us:
Confluent's shares are very volatile and over the last year have had 51 moves greater than 5%. But moves this big are very rare even for Confluent and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 3 months ago, when the stock gained 11.1% on the news that the company reported second-quarter results that surpassed analysts' estimates for revenue and RPO (remaining performance obligations, a leading indicator of revenue). In addition, customer growth remained strong. The company also meaningfully beat on non-GAAP operating profit and improved its gross margin. Forward guidance was also bullish, with next quarter and the full year non-GAAP operating profit guidance particularly impressive vs. Wall Street expectations. On the other hand, there was a slight slowdown in new large contract wins. Overall, it was a good quarter, showing that the company is staying on track.
Confluent is down 27.3% since the beginning of the year, and at $15.53 per share it is trading 60.4% below its 52-week high of $39.27 from July 2023. Investors who bought $1,000 worth of Confluent's shares at the IPO in June 2021 would now be looking at an investment worth $344.40.
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