Summary
Elastic has recently been obliterated in the high growth selloff and is down 57% from highs. Currently, the stock trades only $9 above its 2018 IPO closing day price.
Elastic operates in multiple growing fields with durable, long-term secular tailwinds and a $78 billion TAM.
At 8.4 times forward sales to EV multiple, 42% revenue growth, gross profit margins of 74% and positive operating cash flow, shares are undervalued and present a compelling opportunity currently.
photoschmidt/iStock via Getty Images The growth selloff currently gripping the market has been broad based, taking with it many momentum companies that perhaps did not deserve the extreme valuations placed on them, however it has also taken with it a few high quality growth names. In my opinion, the sell-off in Elastic N.V. ( ESTC ) represents a solid opportunity to purchase a leader in a rapidly growing field at a reasonable valuation. Company Overview
At a very basic level, Elastic offers open source software that makes it possible for users and developers to build their own search tools.
Elasticsearch is the foundation for the Elastic Stack, a collection of open source tools that users apply in the development of solutions for data ingestion, security, analysis, visualization, and storage.
In short, Elastic offers users an opportunity to pull data in from any source, regardless of the format, and make it available for search, analysis and visualization.
These tools are most frequently used to design application searches, site searches, SEIM and enterprise searches. They perform functions like logging, measuring against metrics, monitoring application performance, business analytics, and security analytics.
As developers find innovative ways to apply these tools, new markets and opportunities are opening up for Elastic. The fact that it is open source in my opinion contributes to the company’s overall success and in developing a rampant following in the developer community. Elastic Elastic operates in the very large and highly competitive markets of observability, enterprise search and security. The company believes its TAM (total addressable market) is north of $78 billion as of 2021.
The company believes that its approach of providing free tiers and nurturing wide scale developer usage creates a frictionless adoption by customers and drives a more rapid adoption of the paid self managed and SaaS products.
The company already has penetrated 48% of the Fortune 500 and 34% of the Forbes 2000 and retains a very high 130% net expansion rate. Elastic The company certainly is not the only game in town however as competition is fierce in the markets in which they serve, with Datadog ( DDOG ), Splunk ( SPLK ), Dynatrace ( DT ), Cisco’s AppDynamics ( CSCO ) and New Relic ( NEWR ) battling over subsections of this broad and growing market.
In my opinion, Elastic stands apart from the others in this group due to the open source nature of its product and in the ability to generate a rampant following within the developer community.
Doing a simple job search on Indeed.com and including the words “Elasticsearch” in the job requirements shows a whopping 12,694 current open positions across the USA requiring knowledge or regarding usage of Elastic’s products.
Similar searches including Dynatrace returned 2,549 results, AppDynamics returned 2,401, New Relic returned 1,583, Datadog returned 435, only Splunk returned more than Elastic with 17,990 current open positions.
Now, certainly having a large following does not directly translate to outsized revenue or profitability as clearly Datadog, Splunk and Dynatrace have been able to monetize their solutions to a greater extent to date than Elastic has, but I see reasons for hope on the horizon.
Recently, Elastic’s founding CEO, Shay Banon, decided to step back into the CTO role and Ashutosh Kulkarni was promoted to the role of CEO. I find this change up to be a very positive move as Shay continues to lead in a role that he feels suits his strengths and Ashutosh has proven in his year as Chief Product Officer at Elastic to be a highly capable leader to take the company to the next level.
The next level in Elastic’s future is likely to be greater monetization and a larger focus on enterprise customers expanding use cases. In my opinion, Elastic has all of the pieces to the puzzle to drive the company towards a multi billion dollar revenue future. Valuation
Elastic historically has been valued cheaper on a sales to EV basis than competitors in the field such as Datadog and Dynatrace. There are legitimate reasons for this difference given that Datadog has been growing at 60% plus over […]
Protected by Patchstack