Is Elastic Stock a Buy?

Elastic (ESTC) stock has been on a rollercoaster ride in the past few months. The company’s most recent earnings call was met with disappointment, and shares were down more than 30% after the announcement. Is this an opportunity to buy Elastic stock? What should you do if you already own it?

Last October, a discounted cash flow forecast analysis pegged Elastic share price as overvalued. Multiples didn’t disagree; the company was trading at 22 times trailing sales and 23 times the company’s book value. Investors were worried – negative profits seemed to be the talk of every earnings call.

At the same time, the company’s business was growing hand over fist. Year-over-year revenue was up 43% that August – a “slow” quarter according to Elastic standards.

Earnings seemed to be nothing but in the red, yet, quarter by quarter, they were inching towards breaking even. But it’s the top-line growth that was catching the attention of growth investors, and with the company heavily investing in projects designed to boost growth, the future looked bright as long as the bottom line could be brought into tow.

So what is it that Elastic provides that’s been causing all the top line growth?

What Is Elastic?

Elastic is a cloud computing company that specializes in search, logging, and analytics services.

The company was founded in 2012 by then-CEO, Steven Schuurman. Shay Banon became Elastic’s CEO when Steven Schuurman stepped down in 2017 – the company went public with its IPO the following year.

Elastic offers software products – specifically its open source product called “Elasticsearch” – to help companies gather data around their operations so they can make more informed business decisions.

It’s similar to Alphabet (GOOG & GOOGL) Analytics for websites; though instead of focusing on web traffic, the technology focuses on all types of data including log files, application metrics, and structured/unstructured text documents.

Elastic provides a suite of software to help with data analytics, search and cloud applications. Elastic is often compared to Splunk (SPLK), as they both provide similar services.

Who Are Elastic’s Customers?

Elastic has signed up massive companies as customers, creating a handsome stream of revenue. Some of the company’s search tools are pretty obvious, while others get a bit more creative.

For instance, Walmart (WMT) uses Elastic for real-time fraud detection. Live Nation Entertainment (LYV) – the mother of Ticketmaster – uses Elastic for its ticket-search functionality. Pfizer (PFE) organizes and analyzes its research data using Elastic’s open-source search tools. And that’s just a sampling.

Some other Elastic use cases include:

• Helping Uber locate nearby drivers
• Helping Tinder match users
• Helping Adobe CC users locate the right colors or fonts for their projects

This ever-growing portfolio of household names is just the tip of the iceberg for Elastic.

How Do Companies Benefit from Elastic?

Elastic provides a suite of software services that are designed to help companies analyze data for insights.

These include its Elasticsearch open-source search and analytics engine, as well as other tools like Kibana visualization apps, Beats log shippers, Metricbeat metric collectors (for collecting stats from your servers), and more.

Despite this big growth in the space, there is still some concern over saturation – is Elastic stretching itself too thin? Is there any cause for concern about just how competitive this market might become? 

Elastic Competition: A Cause For Concern?

The industry is growing fast enough that many investors see an opportunity here. You should remember that we’ve seen similar trends before with Big Data and Hadoop. Logz.io, Sumo Logic, and Splunk all compete with Elastic to provide similar services for organizations that need help with big data management or monitoring of their servers.

In addition to these three major competitors, you also have PagerDuty (PD), which is a cloud-based incident response platform designed specifically for IT Operations teams – they’re aiming to take on Elastic, Logz.io, and Splunk.

 

One benefit to using Elastic products over Splunk (SPLK) or any of these other competitors’ offerings is its open-source options.

Open-source software allows users to access different versions of code while also allowing developers to make changes without needing permission from another party. This means it can be customized for just about any application.

Elastic Stock Recent Earnings Call

In Q3, Elastic revenue grew 39% to over $151 million. Expectations remain that FY2021 total revenues will be between $589 million and $590 million. Subscriptions revenue accounted for 93% of overall company revenue.

In order to find the last time a company with similar characteristics had an earnings report that beat expectations by this much, we looked at companies with a similar amount of analysts following it and within the same type of service industry as Elastic.

Only one company met these criteria: Salesforce (CRM), which also released its earnings report recently. In CRM’s case they reported $5.91 billion in total revenue for their latest quarter.

So, is Elastic stock a buy?

In relation to its competitors, other companies in the search space don’t look as attractive as Elastic on paper. Elastic saw a roughly 40% increase over the prior year quarter.

A discounted cash flow forecast analysis suggests there is upside to $185 per share in Elastic share price. At the time of research, that represents about 22% upside potential for new investors.

Is Elastic Stock A Buy – The Bottom Line

Elastic stock is currently near its all-time high, but it’s still among the best cloud software providers when comparing growth rates and business model strength to its competitors.

As ever more company executives realize the benefits of Elastic to scrape through log files, application metrics, and structured/unstructured text documents, expect further adoption of Elastic into their technology stacks and further rapid top line growth for this cloud provider.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.