Last Update 08 Feb 26

Fair value Increased 5.84%

CFLT: Fair Value Outlook Weighs IBM Takeover Risks And Execution Uncertainty

Analysts have lifted their fair value estimate for Confluent to US$30.00 from about US$28.35, reflecting updated assumptions on revenue growth, profit margins, discount rate and future P/E in light of the pending IBM takeover and recent rating changes.

Analyst Commentary

Recent research around the pending IBM acquisition has turned more cautious, with several bearish analysts flagging risks around both the deal outcome and Confluent's stand alone execution.

One research house cut its rating on Confluent to Market Perform from Outperform, explicitly linking the move to the IBM takeover and stating it does not expect a competing bid. That kind of stance suggests limited confidence in additional upside from deal optionality.

On the acquirer side, BofA lifted its price target on IBM to US$335 from US$315 and highlighted a "tougher setup heading into 2026" after what it describes as a strong year in 2025. It also shifted its valuation framework out to calendar 2027 to capture the Confluent acquisition, underscoring that the market is already thinking about execution risk and integration timelines.

Alongside this, another bearish analyst downgrade specifically on Confluent adds to a cluster of more cautious opinions forming around the stock in the run up to the transaction close.

Bearish Takeaways

Bearish analysts see limited upside from the IBM offer itself, with one downgrade explicitly tied to the takeover and a view that no competing bid is likely, which can cap near term valuation expectations.
The reference to a "tougher setup heading into 2026" in IBM research highlights that investors are already weighing integration and execution risk around Confluent, rather than simply treating the deal as a clean catalyst.
Rolling the IBM valuation out to 2027 to reflect the Confluent acquisition suggests a longer runway before the market expects clear payoff from the deal, which can keep a lid on how much credit investors are willing to assign to Confluent's growth story today.
The cluster of downgrades and cautious comments around the same event, the IBM deal, points to a risk that any deviation from the expected transaction terms or timing could pressure Confluent's trading range and compress its P/E assumptions.

What's in the News

IBM entered into a definitive agreement to acquire Confluent for US$11.5b, or US$31 per share in cash, with the deal funded from IBM's cash on hand and backed by Confluent shareholders holding about 62% of voting power who have agreed to support the transaction (M&A Transaction Announcements).
The acquisition received unanimous approval from the boards of both IBM and Confluent, is subject to shareholder and regulatory approvals, and is currently targeted to close by the middle of 2026. The Hart Scott Rodino waiting period already expired as of January 12, 2026 (M&A Transaction Announcements).
IBM expects the Confluent deal to create product synergies across its AI, Automation, Data and Consulting offerings and to be accretive to adjusted EBITDA in the first full year after closing and to free cash flow in year two. Confluent is liable for a US$453.6m termination fee in certain circumstances (M&A Transaction Announcements).
Workato announced a technology partnership with Confluent that links Confluent Streaming Agents and Workato Enterprise MCP, aiming to let enterprises detect patterns in large real time data streams and automatically trigger complex, multi system workflows across thousands of connected applications (Strategic Alliances).
Confluent has scheduled a special or extraordinary shareholders meeting for February 12, 2026, which is a key milestone for investors tracking approvals and any updates linked to the IBM transaction (Special/Extraordinary Shareholders Meeting).

Valuation Changes

The Fair Value Estimate has risen slightly from US$28.35 to about US$30.00 per share, a modest uplift tied to updated model assumptions.
The Discount Rate has edged down from about 8.72% to about 8.66%, reflecting a slightly lower required return in the refreshed analysis.
Revenue Growth has been marked up slightly from about 16.73% to about 17.04%, indicating a small increase in expected top line expansion in the model.
Net Profit Margin has been trimmed slightly from about 12.35% to about 12.24%, a small reduction that partly offsets the higher growth and P/E inputs.
The Future P/E has risen from about 66.82x to about 70.64x, implying a somewhat higher multiple assumption in the long term valuation work.

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

About Confluent

Operates a data streaming platform in the United States and internationally.What are the underlying business or industry changes driving this perspective?

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

How have these above catalysts been quantified?

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

What could happen that would invalidate this narrative?

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

How have all the factors above been brought together to estimate a fair value?

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.

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Disclaimer

AnalystLowTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystLowTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystLowTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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