Shares of data infrastructure software company, Confluent (NASDAQ:CFLT) jumped 10% in the morning session after Bernstein analyst Peter Weed initiated coverage on the stock with an Outperform (Buy) rating and assigned a price target of $34. The price target indicated a potential 80% upside from where shares traded when the coverage was initiated. This is very significant upside and shows that the analyst is putting a stake in the ground that CFLT is massively underpriced and underappreciated. Weed highlighted Confluent's strong position in the cloud, emphasizing its leadership in self-hosted and managed Kafka. He projected a potential annual recurring revenue of $6 billion by 2030 as Confluent continues to gain market share.
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What is the market telling us:
Confluent's shares are very volatile and over the last year have had 48 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 27 days ago, when the stock dropped 27.1% on the news that 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 (Sell) 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.
Confluent is down 3.6% since the beginning of the year, and at $20.56 per share it is trading 47.6% 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 $456.69.
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