confluent (CFLT) i hubspot (GOALS -0.52%) Both are cloud-based software companies that have been updating their platforms with artificial intelligence (AI) features.
Confluent’s platform processes “data in motion” as it flows between an organization’s various applications and services, and it recently released new tools to analyze AI application data flows. Hubspot has been incorporating new AI tools across its ecosystem of cloud-based customer relationship management (CRM), marketing, analytics and data visualization services.
However, neither stock has received as much attention from bulls as Nvidia, Microsoft (MSFT 0.02%), or other major AI actions. In contrast, Confluent’s stock fell nearly 80% over the past two years, as Hubspot’s stock fell more than 40%. Let’s see if any of these underdog cloud stocks are worth buying today.
Image source: Getty Images.
Confluent is bracing for a near-term slowdown
Confluent’s eponymous platform is based on Apache Kafka, an open source data streaming platform that was originally built to process data for LinkedIn. The creators of Kafka founded Confluent as a simplified way to offer Kafka’s data streaming tools as cloud-based services to other companies.
From 2019 to 2022, Confluent’s revenue grew at a compound annual growth rate (CAGR) of 58%, while its total number of largest customers, generating more than $100,000 in annual recurring revenue (ARR), it nearly tripled from 337 to 991.
But in 2023, Confluent expects its revenue to grow just 31% as headwinds from the macro force companies to rein in their cloud-based spending. On the bright side, it expects its adjusted operating margin to turn positive again in the fourth quarter of the year and be just negative 9% for the full year, compared to negative 30% in 2022. The analysts also expect the company to return. profitable on an adjusted basis in 2024.
Confluent’s margins are expanding as it laid off about 8% of its workforce this year and continues to rein in spending to deal with its near-term slowdown. It also closed its most recent quarter with a gross retention rate of over 90% and retains the lead as the first mover in the Kafka-as-a-Service market. Its introduction of new AI-driven data streaming services could lock out its existing customers and widen its competitive moat.
However, Confluent still has to contend with smaller competitors like Cloudera and tech giants like AmazonMicrosoft i IBM — who have been integrating Kafka-based data streaming services into their own cloud platforms. Such intense competition could reduce Confluent’s pricing power and squeeze its gross margins.
Hubspot faces similar headwinds
Hubspot’s free cloud-based CRM platform appeals to smaller businesses that don’t need larger enterprise-oriented CRM platforms such as Sales force (CRM 9.36%) or Microsoft Dynamics. Once you lock in these customers, you cross-sell additional marketing, lead generation, search engine optimization and analytics services. He specializes in “inbound” marketing campaigns such as social media campaigns, viral videos or blogs that drive consumers to search for brands on their own.
From 2017 to 2022, Hubspot’s annual revenue grew at a CAGR of 36% as it quadrupled the number of customers from 41,593 to 167,386. But for 2023, it expects only 24% growth as it faces tougher macro headwinds.
Like Confluent, Hubspot laid off about 7% of its workforce and slowed spending over the past year as its core growth cooled. As a result, it expects its adjusted operating margin to expand from 10% in 2022 to 15% in 2023 and its adjusted EPS to more than double. It’s also confident it can keep its net revenue retention rate, which measures its year-over-year growth per existing customer, comfortably above 100% as it implements new AI tools to generate digital content, summarize calls and emails, help the customers. with chatbots and speed up data analysis.
The future looks bright for Hubspot, but it still faces a lot of competition in the CRM market. If larger competitors like Salesforce and Microsoft implement simpler CRM services for smaller businesses, Hubspot could still lose its pricing power. Other cloud software giants like Adobe it could also disrupt their sales and marketing platforms.
The ratings and the verdict
None of these cloud stocks are a bargain yet. Confluence trades at 104 times forward earnings, while Hubspot has a forward price/earnings ratio of 71. So personally, I wouldn’t rush to buy any of these stocks right now when there are still so many other stocks high quality technologies. sale But if I had to pick one, I’d pick Hubspot because its sales growth is more stable, its margins are healthier, it’s profitable, and its stock looks much cheaper.
John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Adobe and Amazon. The Motley Fool has positions in and recommends Adobe, Amazon, Confluent, HubSpot, Microsoft, Nvidia and Salesforce. The Motley Fool recommends International Business Machines and recommends the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.
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