Why Confluent Stock Ripped Higher on Monday
Key Points
IBM will pay $11 billion in cash to acquire Confluent.
Confluent is a much smaller tech stock, and growing much faster than IBM.
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IBM (NYSE: IBM) is buying Confluent (NASDAQ: CFLT) -- that's the big tech headline this morning -- and it's driving shares of the data streaming platform 29.2% higher through 11:50 a.m. ET Monday.
IBM stock is also up, but only 1.5%.
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Details, please
In a press release this morning, IBM announced the deal as a signed, definitive agreement to acquire all outstanding stock of Confluent for $31 cash. As the company explains, "Confluent excels at preparing data for AI, keeping it clean and connected across systems and applications, eliminating silos inherent in agentic AI." Bringing Confluent in-house will give IBM a "smart data platform for enterprise IT, purpose-built for AI," boosting IBM's own artificial intelligence business. As IBM points out, Confluent's own total addressable market has already doubled in size over the past four years, reaching approximately $100 billion.
Assuming shareholders give their blessing and regulators allow the deal to proceed, Confluent could become part of IBM as early as H1 2026.
Can Confluent make IBM stock a buy?
IBM's paying a small premium for Confluent stock, about 6.7 times trailing sales, versus IBM's own price-to-sales valuation of 4.5x. It may be worth the premium price, though, if Confluent can help substantially accelerate IBM's growth rate.
Can it, though? Analysts peg IBM for 7% earnings growth over the next five years, versus 24% for Confluent -- that's a point in the acquisition's favor. At 37 times earnings, though, IBM stock looks overpriced for its growth rate, and honestly, I think it's going to remain overpriced even after acquiring Confluent.
While Confluent is growing quickly, its revenue today is just a drop in the IBM bucket -- $65.4 billion deep. Adding Confluent's $1.1 billion, I fear, won't be enough to turn IBM stock into a buy.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool recommends Confluent. The Motley Fool has a disclosure policy.
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