Competition And Regulation Will Limit Cloud Growth But Enable Recovery

Key Takeaways

• Persistent customer cost-cutting and slower adoption of new use cases may limit revenue growth despite strong demand and new offerings.
  
• Rising competition, regulatory costs, and high marketing spend create uncertainty around sustainable margin improvements and long-term scalability.
  
• Slower customer growth, margin pressures from discounting, and market share losses signal decelerating core business momentum and potential challenges to future profitability.

Catalysts

Operates a data streaming platform in the United States and internationally.

• Although Confluent is seeing strong demand from long-term trends like the rapid growth of real-time AI workloads and expanding enterprise cloud adoption, persistent consumption optimization by large customers and slower new use case adoption could continue to constrain revenue growth over the next several quarters.
  
• Despite robust ARR growth in offerings such as Flink and WarpStream, the company faces structural headwinds from IT budget rationalization and a shift by some AI-native customers towards self-managed or on-premise solutions, which may undermine the scalability of its cloud-first recurring revenue model.
  
• While Confluent's differentiated capabilities and successful displacement of cloud service provider streaming solutions suggest strong product-market fit, increasing data privacy regulations and compliance costs could delay large enterprise deployments and impose pressure on operating margins.
  
• Even with increased operational efficiency and expanding partnerships boosting gross and operating margins in the short-term, continued high sales and marketing investment is required to land and expand customers in a maturing core market, making sustainable net margin improvements uncertain.
  
• Although expansion into new customer segments and geographies is supported by secular trends around event-driven architectures and data governance, intensifying competition from hyperscalers and open-source solutions could erode pricing power and slow the trajectory of top-line and earnings growth.

Confluent Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Confluent compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Confluent's revenue will grow by 14.8% annually over the next 3 years.
• The bearish analysts are not forecasting that Confluent will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Confluent's profit margin will increase from -29.3% to the average US Software industry of 13.1% in 3 years.
• If Confluent's profit margin were to converge on the industry average, you could expect earnings to reach $211.0 million (and earnings per share of $0.53) by about September 2028, up from $-311.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 49.0x on those 2028 earnings, up from -21.3x today. This future PE is greater than the current PE for the US Software industry at 35.7x.
• Analysts expect the number of shares outstanding to grow by 5.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.9%, as per the Simply Wall St company report.

Confluent Future Earnings Per Share Growth

Risks

• Persistent customer optimization efforts, especially among large enterprise clients, are causing slower than expected growth in cloud consumption and may put sustained pressure on subscription revenue growth rates in the coming years.
  
• A slowdown in net new customer additions-particularly in the key $20,000-plus and $100,000-plus ARR segments-raises concerns about the long-term expansion of Confluent's addressable market and could result in muted revenue growth and a weaker customer acquisition funnel.
  
• Increased discounting and commitments to secure longer-term contracts with large customers are driving growth in remaining performance obligations but may compress average selling prices and lower gross margins over time, constraining operating leverage.
  
• The ongoing movement of some AI-native and large tech customers from managed Confluent Cloud to more self-managed platforms or alternative architectures signals potential market share loss and could lead to reduced cloud revenue and net retention rates.
  
• Expectations of continued month-over-month cloud growth rates being notably below prior years, combined with near-term pressure on both net revenue retention and gross retention metrics, suggest that core streaming growth is decelerating and could translate to lower future earnings growth and profitability.

Valuation

• The assumed bearish price target for Confluent is $20.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Confluent's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $36.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $211.0 million, and it would be trading on a PE ratio of 49.0x, assuming you use a discount rate of 8.9%.
• Given the current share price of $19.24, the bearish analyst price target of $20.0 is 3.8% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.