AI Sleeper-Play Confluent Is Ready To Rocket Higher

Key Points

• Confluent is getting attention from analysts as hopes for AI drive the outlook for earnings. 
• Institutions helped the stock to bottom in 2022 and are pushing it higher now. 
• The stock could gain another 33% before hitting significant resistance. 

Confluent NASDAQ: CFLT is a small data-streaming platform about to hit the big time. Its cloud-native services connect and process data in real-time, providing a vital service for business and industry. The hybrid multi-cloud offering is perfect for the evolving world where data and applications may be stored in several clouds. And it is essential to the world of AI. The data streaming and database services are ideal for training large models, and the models are only getting bigger. Blue-chip operator Oracle just released a blowout report that has its shares rocketing up to all-time high levels. Confluent isn’t the size of Oracle, but it could easily see results that compare. 

Analysts Raise Targets, Still Underestimate Growth Potential 

In the words of Oracle NASDAQ: ORCL founder Larry Ellison, the cloud is growing faster, which is a strong tailwind for Oracle and Confluent. The analysts expect Confluent to post YOY growth in the range of 30% when it reports on August 2nd, which may be underestimating the business, even with the analysts raising their targets. Oracle’s cloud business grew by 54% in the quarter, and the IaaS segment led with growth of 76%. This opens the door for substantial outperformance on the part of Confluent, which is seen in the consensus price target for the stock. 

The 18 analysts with current ratings think the stock is a Moderate Buy. The consensus price target assumes the stock is fairly valued, trading near $35 but up 16% in the last 30 days. The analysts were warming to the name before Oracle’s release, but that event sparked 10 updates. One is bearish, a downgrade to Neutral from Guggenheim, but the remainder are all price target increases. Those targets range from $39 to $45, about 11.5% of upside from the current consensus, at the low end of the range. 

The institutional activity is robust. The institutions own about 40% of the stock going into the earnings season and have been buying on balance for 3 consecutive quarters. This coincides with a bottom in the price action, and the buying has ramped higher in the last 2 quarters. That coincides with a recent rally in the stock that could gain momentum over the next few weeks. Buying is broad and spread among a large number of institutions. Recent buyers include Altimeter Capital Management which owns nearly 5% of the stock, and T. Rowe Price, which owns more than 4%. 

Confluent Has Momentum In Q1. Will It Continue In Q2? 

Confluent had clear momentum in Q1, with results outperforming on the top and bottom lines. The 38% revenue growth was driven by an 89% increase in Cloud revenue that could accelerate in the coming quarters. The revelation of AMD’s NASDAQ: AMD MI300X super chip marks the first shot in a war to dominate the AI data center market. It will surely spark a round of technological improvements in AI driving business for the entire cloud complex. Businesses that can connect, control, process, and distribute the data needed for AI will be in high demand. 

The chart of CFLT stock is promising. The market hit its post-IPO bottom early in 2023 and spent the next 4 quarters consolidating. The stock price is increasing in Q2 and gaining momentum due to a sustained uptick in volume. If this continues, the market should continue to move higher and, if there is a catalyst, potentially much higher. The current setup suggests a bullish flag/consolidation with a $13 flag pole. Continuing the trend could gain as much as $13 or about 33%. That move would put the market near the mid-point of its range and at a critical turning point.