Deep dive on Confluent Inc

TL;DR

• Through Kafka, Confluent (CFLT) provides customers with the ability to build applications that react to data.
• Kafka is used by more than 70% of Fortune 500 companies as its scalability and ability to update data quickly bring significant advantages over traditional infrastructure.
• This makes it well positioned to succeed in the large data infrastructure market, which is expected to grow at 22% CAGR to reach $91 billion in 2024.
• Reflecting this strong market position, Confluent trades at a premium to its peers.

What is Confluent?

Confluent is founded by the original creators of Apache Kafka, which is a new data infrastructure designed to connect all applications, systems, and data layers of a company around a real-time central nervous system. 

In today’s digital-first world, companies need the ability to build applications that react and respond to data. Organizations need a foundational data platform, to operate their business in real-time based on data as it is being generated in the moment. 

As of the release of their S-1 filing, more than 70% of Fortune 500 companies use Kafka, where 30% are paying customers.

• Netflix uses Kafka to apply recommendations in real-time while you’re watching shows.
• Uber uses Kafka to gather user, taxi and trip data in real-time to compute and forecast demand, and ultimately compute pricing in real-time.
• LinkedIn uses Kafka to prevent spam, collect user interactions to make better connection recommendations in real-time.

What are some of the reasons to be positive on Confluence? 

#1 – Kafka has significant advantages over traditional infrastructure 

It brings 2 main advantages over traditional infrastructure:

• Scalability: The problem with the traditional infrastructure comes when multiple applications need to access and update the same data. If you have 4 data sources and 6 applications, you’ll need to write 24 integrations! With Kafka, companies can scale by adding multiple applications to their existing system without worrying about complex data integrations. 
• Timing issues: Through the idea of “data in motion”, Kafka allows data to be stored as “events” and any application that needs access to an event can subscribe to a Topic to pull the latest event out.

Kafka is great for accessing & updating data really fast and at scale as companies add more solutions to their platform.

What is truly exciting is in the area of autonomous & connected cars. The combination of connected, self-driving, electric cars, and RoboTaxis is going to happen in the next decade, and the largest automotive companies are betting heavily on Kafka as a foundational layer to enable that. Did someone say, Tesla? 

Kafka enables connected cars to continuously send streams of data which can be used to warn us of an accident coming ahead, gather mapping data to power self-driving cars, and enable predictive maintenance to tell you to get off the car before it breaks down.

#2 – Well positioned to succeed in large and growth data infrastructure market

Confluent is well-positioned to succeed in the large and growing market for data infrastructure. They intentionally built their technology to support both cloud and on-premises environments because enterprises today are in different stages of their journey to the cloud. This strategy has positioned them to be able to serve every type of company, in every industry, and in every geography. 

According to Gartner’s 2021 estimates, the aggregate of these four markets represents a Total Addressable Market (TAM) of approximately $149 billion.

Today, Confluent’s product roadmap targets each of the following four core Gartner-defined market segments, and their Serviceable Addressable Market (SAM) is estimated to be $50 billion, broken down as approximately:

1. Application Infrastructure & Middleware ($31 billion)
2. Database Management Systems ($7 billion) 
3. Data Integration Tools and Data Quality Tools ($4 billion) 
4. Analytics and Business Intelligence ($7 billion) 

Based upon the above Gartner data and Gartner’s estimates for 2024 total market size in these four segments, they estimate that their SAM will increase to $91 billion in these four market segments by 2024, representing a 22% CAGR.

#3 – Management was solving painful problem they were facing

One of the key things to look for is founders who are Customer Zero, meaning that founders are solving a painful problem they themselves are facing. In this case, during their time at LinkedIn, they needed to completely redesign LinkedIn’s infrastructure and accommodate their growing membership and increasing site complexity. They thought that it seems like a pretty common problem other engineers might face hence they thought that there would be a solution online. However to their disbelief, there wasn’t any. Consequently, they went ahead to build their own solution and saw a huge opportunity with it. That was how Kafka was born.

What would Beansprout do? 

• Confluent’s competitive advantage in a large and growing data infrastructure market makes it a stock to watch. This is seen from its strong revenue growth, which is expected to grow at 36% year-on-year in 2022, above most of its peers such as Palantir and Unity Software. However, this is also reflected in its valuation, where it trades at a higher price to sales valuation compared to its peers with the exception of Snowflake. Hence, its share price could still be volatile in the near-term given the ongoing sell-off in tech related stocks.
• Key risks would include customers abandoning Kafka when they have a better or cheaper alternative, as well as Kafka being able to maintain its product leadership and innovation by building out their platform.