Insights

Why Confluent Stock Fell 13% Today

What happened
The stock market is unforgivingly selling off tech stocks again today. The Nasdaq Composite index was down 3.1% as of 12:45 p.m. ET. Once high-flying software technologist Confluent (NASDAQ: CFLT) is being especially punished, down 13.3% on the day and now down over 70% year to date.
So what
Today’s sell-off in Confluent appears to be a continuation of the dramatic downturn last week after it reported first-quarter earnings. The company actually beat the average analyst’s expectations. 
However, Confluent is in growth mode right now as organizations look for new tools to manage their cloud computing and next-gen IT infrastructure. To maximize its opportunity to grab market share, Confluent is spending lots of money on sales and marketing, as well as on research and development. As a result, the company is generating ample losses — free cash flow was negative $58 million in Q1 on revenue of $126 million. With the Federal Reserve aggressively raising interest rates and many investors worrying about the rising risk of a recession, companies that lose money like Confluent are currently out of favor.  
Image source: Getty Images.

Now what
For what it’s worth, Confluent has plenty of cash on hand to afford its steep losses. At the end of March, it reported having $1.05 billion in cash and equivalents and another $943 million in short-term investments, offset by $1.08 billion in convertible debt.  
For now, though, investors are focused on those losses, as well as a slowing rate of growth. Management has said to expect full-year 2022 revenue to increase “only” 44%, down from the 64% pace of sales expansion reported in 2021. With no profitability and still trading at 7 times one-year forward expected sales, investors now need to weigh whether this stock is worth the premium being placed on its future growth potential. Given how big the cloud is already and how much bigger it will get in the next decade ($1 trillion in annual spending in about five years from now, by some estimates), Confluent is an intriguing company to consider after the steep sell-off.
Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Confluent, Inc. The Motley Fool has a disclosure policy. –

What happened

The stock market is unforgivingly selling off tech stocks again today. The Nasdaq Composite index was down 3.1% as of 12:45 p.m. ET. Once high-flying software technologist Confluent (NASDAQ: CFLT) is being especially punished, down 13.3% on the day and now down over 70% year to date.

So what

Today’s sell-off in Confluent appears to be a continuation of the dramatic downturn last week after it reported first-quarter earnings. The company actually beat the average analyst’s expectations

However, Confluent is in growth mode right now as organizations look for new tools to manage their cloud computing and next-gen IT infrastructure. To maximize its opportunity to grab market share, Confluent is spending lots of money on sales and marketing, as well as on research and development. As a result, the company is generating ample losses — free cash flow was negative $58 million in Q1 on revenue of $126 million. With the Federal Reserve aggressively raising interest rates and many investors worrying about the rising risk of a recession, companies that lose money like Confluent are currently out of favor.  

Image source: Getty Images.

Now what

For what it’s worth, Confluent has plenty of cash on hand to afford its steep losses. At the end of March, it reported having $1.05 billion in cash and equivalents and another $943 million in short-term investments, offset by $1.08 billion in convertible debt.  

For now, though, investors are focused on those losses, as well as a slowing rate of growth. Management has said to expect full-year 2022 revenue to increase “only” 44%, down from the 64% pace of sales expansion reported in 2021. With no profitability and still trading at 7 times one-year forward expected sales, investors now need to weigh whether this stock is worth the premium being placed on its future growth potential. Given how big the cloud is already and how much bigger it will get in the next decade ($1 trillion in annual spending in about five years from now, by some estimates), Confluent is an intriguing company to consider after the steep sell-off.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Confluent, Inc. The Motley Fool has a disclosure policy.

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