Concerns about Elastic

Investment Analysis Clubs Saul’s Investing Discussions
1

Almost everyone keeps telling me that I should have kept Elastic in spite of my doubts about its business model that I explained in my last two or three monthly reports. On the other hand, I had the impression that the market has agreed with my concerns about Elastic and that the stock has been relatively stuck in place compared to my other stocks and hasn’t moved the way they have. I thought I’d take a quick quantitative look and see if my impressionistic impression was correct.

Okay, since that December 24th bottom (roughly three and a half months ago) here’s what my major positions have done:


**Mongo rose 	  100.1% 	(71.8 to 143.7)**

**Zscaler rose 	   93.8%	(34.95 to 67.75)**

**Tradedesk rose	   88.0%	(106.6 to 200.4)**

**Okta rose          74.0% 	(54.6 to 95.0)**

**Twilio rose	   65.2%	(76.1 to 125.7)**

**Alteryx rose	   63.9%	(49.9 to 81.8)**

That seems like a fairly consistent range of gains between 64% and 100%, and an average gain of 81%.

Then we come to Elastic:


**Elastic rose 	   32.5% 	(62.5 to 82.8)**

That’s only about half of the lowest of the other rises, and only about a third of the top two rises. It’s sitting there all by itself. I’m not saying that you shouldn’t buy Elastic because it hasn’t moved like the others. It might be a bargain, left behind because it was misunderstood. What I am saying is that those figures imply that a lot more people than just me have had concerns about the business model.

I know that a lot of people on the board still have large positions in Elastic and I hope and suspect that they will have great results and shoot up for you, but I’ll pass for now.

Best,

Saul

32 Likes
2

I think part of the issue is all the stock lockup that will be released after April ER.
I think it is April 22 but don’t quote me.

Are there any companies that have had lockups that big and what was the performance of that stock before/during/after the lockup? I should think history has some good examples.

1 Like
3

Saul,

ZS IPO was in March 2018 around $33. Was flat until a big ER pop in late May/June 2018, and then more or less did nothing from early June to end of Dec 2018. 7 months of essentially no price appreciation.
One possible reason? ZS started with a very rich IPO P/S out of the chute.

ESTC IPO was Oct 2018 around $70, which wasn’t great timing due to tech slide thru Dec. However, it also launched with a rich P/S out of the chute. Like ZS, it took off in 2019, and ran to $99 in late Feb, then got hit with Amazon FUD and share lockup expiration concerns, and now sits at $82.

So ESTC has been around for 6 months, and is up 17% in that time.

At 6 months post-IPO (Sept), ZS was at $42, or $27% above IPO. Again…it didn’t do much until January…so another 3-4 months. So basically ZS only appreciated 27% for about 9-10 months from IPO price.

In contrast, SQ has moved about 12% or so since June 2018. Seems you had a lot more patience there.

Dreamer

30 Likes
4

Saul,
2 issues holding the stock in the short term. The Amazon Opendistro which in the long term should not impact IMO. The other issue is share lock-up. 25% of the locked up shares was available in early March and stock went from 90+ to 80. A portion of the reminder (one held by non-insiders) was released on 4/3 and the reminder (the insider part) will be released 3 days after EC. So, market is likely weighing those.

5 Likes
5

In contrast, SQ has moved about 12% or so since June 2018. Seems you had a lot more patience there.

Hi Dreamer,
If you remember I did cut my Square position down quite a bit, and then built it back some. Actually Square has risen 48% from that December bottom, although it’s like watching paint dry. But the real difference is that Square isn’t an open source model. It doesn’t scare me. It also doesn’t have a killer-whale attacking it (the killer whale may turn out to be toothless, but who knows). Square also accelerated their adjusted revenue growth from 43% yoy for 2017 over 2016, to 61% yoy in 2018 over 2017, and its subscription and service revenue, the good stuff, grew by 139% last year, and was more than 10 times what it was three years before. Their adjusted EBITDA in the last four years has gone from minus $42 million to plus $46 million to $138 million to $256 million …positive! Adjusted EPS is still very small compared to stock price, but has gone from -39 cents to +4 cents, to +27 cents to +47 cents (certainly moving in the right direction). So yes, I’ve had more patience. My problem with Elastic wasn’t lack of patience, but lack of confidence in their business model, and my little exercise just showed me that I wasn’t the only one.
Saul

23 Likes
6

I also have concerns about Elastic. Not enough to sell my shares, but enough that I won’t add more until I get more confident. So it’s a 2% position for me. Enough to where it will be nice if it’s a massive winner, but small enough that I won’t care if it’s a total disaster.

7

That’s only about half of the lowest of the other rises, and only about a third of the top two rises. It’s sitting there all by itself. I’m not saying that you shouldn’t buy Elastic because it hasn’t moved like the others. It might be a bargain, left behind because it was misunderstood. What I am saying is that those figures imply that a lot more people than just me have had concerns about the business model.

I think that one factor holding ESTC back is their IPO lockup expirations. Because the stock had moved past the trigger level (25% appreciation,I seem to recall) there was an unlock of 25% on April 2nd or 3rd. The larger unlock seems to be 3 days after their next earnings report (on or about June 3rd?)because of their earnings blackout period. I have about 2/3rds of my targeted position pending that unlock. Hopefully their report will be good enough that I may have to add the rest of my position higher… hopefully MDB or TTD like higher ($20-$50). May be wishful thinking.

Rob

8

ESTC IPO’d in the beginning of October.

If you look at a chart of ESTC vs ZS, you will see they performed in lockstep until the end of Feb. , up about 36% each.

Now (since the beginning of OCT):

ZS up 86% (gained an additional 50% since end of Feb.)

ESTC up 26% (lost 10% since end of Feb.)

The market is telling us something.

Amazon FUD? Maybe

lock up expiration? Maybe

ZS have great earnings that the market liked? yes

ESTC have earnings reports and a chance to wow the market? yes

did they? no

In the end, it doesn’t matter the reason, the market is telling us it likes ZS much better since March 1st.

Jim

5 Likes
9

This feels like reducing the importance of the ER and growth numbers and putting a higher importance on Relative Strength.

That would have allowed “mere” 40% type growth stocks like NOW to have been considered, given they are a SaaS stud and have been on a stock appreciation tear for 2 years.

The same with CRM, ZEN, etc…

AYX has been a top stock of yours yet has a very choppy chart.

I guess my point is that it feela more in line with your stock-picking methodology for you to say you just dont have faith yet in their bus plan, vs caring what the market thinks during a fairly short period of time.

You have great intuition, so i wouldnt bet against your decisions. Just trying to understand where RS fits in a bit better.

Dreamer

15 Likes
10

I hear you Saul, and I respect your stock investing in many ways. Your board and the many experts here have taught me a new way of investing – most recently SaaS hypergrowth. At the same time, I’m not as nimble as you or many here. I still get stuck on what a business does, and who else might do it better over time.

With that in mind, I find ESTC compelling. Their product offering is leading edge, they’re innovating quickly, competitors are issuing more press releases than software releases.

Sure, they’re growing slower than others in the SaaS/hypergrowth segment in a most recent window. But I cannot commit to chasing only the companies that grow the fastest over the last quarter or month or week. I’m OK holding ESTC and giving them another earnings report to run. In fact I’ve bought more ~$80 recently and will add on any dips. What they offer is unique, necessary and growing exponentially as a business need / solution.

That said, the only other time in the last ~15 months I’ve been lurking here where I disagreed with your monthly report on selling was with MDB. You bought back in later; I hope ESTC leads you to the same action as well.

Respectfully.

15 Likes
11

Elastic is iterating new versions of its product at Ana amazing pace. It was only what? Last month that version 6.6 or whatever came out. Now version 7.

From reading trade boards Elastic is nearly unprecedented in the number of new iterations it makes to its software. Some think that is a bad thing as they do not beta test enough and keep all aspects of their products together. Others, however, see an impossible to keep up with machine.

What was it, 69% growth last quarter? Highly disappointing.

The problem w Elastic is that it is valued like Zscaler was and is. Zscaler accelerated growth and Elastic basically maintained growth. Is the insider release an issue? I don’t know.

Given its current market cap however, difficult
But not impossible of course to see it trading lower a year from now. But who knows such things.

I do t have the link on me, but posted it on NPI, how difficult it was to replicate the X functionality that Elastic sells. There are no good ways to do so but write your own code or combine multiple inferior products that will still cost you money.

Thus why no one but the titans and small operations w little budget even try to make do w mission critical and operational Elastic deployments.

Yes, Elastic has recently underperformed.

Tinker

5 Likes
12

Investing in new public companies can be challenging. They come in multiple flavors. They set an IPO price and either the market determines they are crushers or not sure yet. Some open out of the gate with a huge gain some not so much.

ESTC reminds me a lot of like ZS. ZS IPO price was $16. They opened at $27 because the market loved them and saw their potential. It would never be “cheap” because ZS is a star. And then traded in a range of $30-40 for the next nine months. I held ZS for a long time with little to no gain for a long period because they were so highly regarded by the market. Not because ZScaler the company was underperforming but they had to catch up to where the market valued them. High 20s to 30s on EV/S. And added when it was bouncing off lows. With all the “lockup” FUD and all. Holding paid off as they finally took off. What do they do over next few months. Who knows probably bounce in a range until the next blast off.

Now looking at ESTC. The IPO price was $37. The open was $70 and within a few months it was $100 after a brief dip in the $60s where I was able to start a position. Valuation was a high of 35 and a low of mid 20’s. Tell me how the market is voting against ESTC here. We are only one month removed from the $100 high. In the middle of “lockup” FUD. Nothing is troubling about Elastic the company. Quite the opposite with sustaining nearly 70% growth and innovating and being “loved” by developers. I think with as with ZS, time is your friend here, because what the company provides is in hot demand.

Other IPOs have not favored so well because from the start they weren’t so loved by the market. LYFT is the obvious one here. $72 IPO and has trended down from there to $59 now. A fraction of the valuation. That’s what not being loved looks like.

If ESTC was cheaper I might be more worried. But they are very far from being shunned by the market. Still outrageously valued and that shows me confidence.

Darth

43 Likes
13

How about a comparison with MDB?

When ESTC was going public we had plenty of posts about how similar the two were in terms of business plan, valuation, growth rates.

MDB had their IPO 10/19/2017 and went from about $30 to a high of $40 (33% gain) over the first 5 months (3/26/18) then drifted down until its lockup ended on 4/17/18. It hit $36 about a week after its lockup ended (a gain of about 20% over the opening day price).

ESTC had their IPO on 10/1/17 and went from about $70 to a peak of $94 (34% gain) over the first 4.5 months (2/18/19) then drifted down until its lockup ended on 4/2/19. It’s now $82 about a week after its lockup ended (a gain of about 17% over the opening day price).

MDB has since risen to over $150 (now a bit lower than that) in about a year (roughly up 300%)

I understand the valuations were different with MDB seemingly valued much lower in early 2018 and it remains to be seen whether ESTC can execute as well as MDB has in the past year. Yet the similarities are striking and it makes me less concerned about the lower relative strength of ESTC to this point.

19 Likes
14

“I understand the valuations were different with MDB seemingly valued much lower in early 2018 and it remains to be seen whether ESTC can execute as well as MDB has in the past year. Yet the similarities are striking and it makes me less concerned about the lower relative strength of ESTC to this point.”

Except they are not strikingly similar as in your above post you long out that MDB was seemingly valued much lower in early 2018.

So at the same stage that ESTC is at right now, wasn’t MDB a much better value after its lock up expired?

2 Likes
15

Saul re: “Almost everyone keeps telling me that I should have kept Elastic in spite of my doubts about its business model…”

Unless I missed something, the last time you posted your monthly you said you now have a 1.1% position in Elastic. Is that still the case or are you out of it now?

MoneySlob re: “I think part of the issue is all the stock lockup that will be released after April ER. I think it is April 22 but don’t quote me.”

I’m fairly certain that both lockup expiration have come and gone. The first lockup expiration, albeit only 25%, should have been big enough to satisfy almost anyone’s itch to take a little off the table. If I recall correctly there weren’t a lot of form 4’s filed with the SEC last month and there wasn’t a lot of insider selling. You are correct in assuming that the next big event is earnings, and some employees will probably sell a bit after earnings. Most all companies have a blackout window surrounding earnings; this is what we will be dealing with forever more. I expect that most insider-employee selling will occur if there’s a major pop in share price; otherwise, I wouldn’t expect a lot more employee selling than we saw last month. IMHO, the 25/75 lockup expiration should not have much of an effect on employees but institutional investors may become more active. Fortunately, they tend to be very careful with their trades so we probably won’t see much of an effect as they begin taking profits.

Tinker re: "Elastic is iterating new versions of its product at Ana amazing pace. It was only what? Last month that version 6.6 or whatever came out. Now version 7.

I was a little surprised today when I looked over the press for Elastic and saw how many product announcements were made this week. All seemed like things that might give them a competitive edge over those following in their footsteps… (Off topic: Tinker, your TMF profile only shows you holding shares of YNDX, MAKO, XONE; is that really the case or are you now invested in some of Saul’s favorites?)

It’s interesting reading the recent threads on Elastic. Personally I find it harder to invest in it than any of Saul’s other picks, but I’m holding my little position because I feel that most of the recent threats are overblown.

For those who like to create polls, it would be interesting to know where investors here would put new money to use in their portfolios (taking into account positions they already have). I hold a relatively small investment in Elastic but frequently consider re investing it in some of Saul’s top nine investments.

Take care,

VR_Robear

3 Likes
16

Except they are not strikingly similar as in your above post you long out that MDB was seemingly valued much lower in early 2018.

True, but MDB was also not growing as fast as ESTC and losing more money if I recall, so perhaps there’s a reason for the lower growth. I was just speaking about the price action with regard to the IPO and initial lockup. Maybe it’s unrealistic to expect ESTC to accelerate growth like MDB (especially considering the benefits MDB had of adding Mlab) and I don’t see anything like Atlas, but that is where one must decide whether ESTC is worth a long term investment. There are a lot of folks who like to use relative strength as a factor in their decisions (myself included) and I was pointing out my reasoning for not being too worried about the relative weakness over the past few months.

1 Like
17

Off topic: Tinker, your TMF profile only shows you holding shares of YNDX, MAKO, XONE; is that really the case or are you now invested in some of Saul’s favorites?
…
For those who like to create polls, it would be interesting to know where investors here would put new money to use in their portfolios (taking into account positions they already have). I hold a relatively small investment in Elastic but frequently consider re investing it in some of Saul’s top nine investments.

Robear1020,

I’m sure you know this, but not only is your question about Tinker’s holdings off-topic, but so is the question about what others are doing with new money. I’m really not trying to pick on you…a lot of people have the same questions, and many post them. Forgive me for running with this one example…it’s really not just you.

But it is a problem. This is important. Please, everyone, it is crucial that you reason from first principles. You can enjoy the fact that members of this board agree with your take on a company/stock. But you need to evaluate each company on its own merits. Consensus means nothing. In fact, if we look too much for consensus, the great community on this board will stop being able to evaluate things so well.

The reason we succeed is because we disagree and see whose argument is better. There was some consensus on Nutanix. And on Pivotal. Same for many of us who were dead wrong in selling Mongo! If we can find and learn from the flaws in arguments we’ve made, and places were we’ve inaccurately had consensus, the whole board can get even better!

So please, let’s keep focused on the investing discussions and evaluating arguments.

Bear

42 Likes
18

Yeah, that profile is lord knows how old. I got out of XONE at its top despite people calling me a short at the time. One such poster I literally had to threaten with a lawsuit as I was being accused of hyping and then shorting the stock.

Instead what happened is that the founder, in a secondary that was a mere 6 months out, sold more than $67 million in stock (the majority of the secondary) and discussions with Mauser turned a light bulb on with me and I dug deeper into their processes. The kilning process makes it nearly impossible to create the required precision needed for high value parts. As such the technology was self-limiting so I SOLDDDD! I did share that with people. And you can see the response that I received.

I remember holding that Russian search engine company for 3 days and selling, and I don’t even recall the other. But that was a long time ago. I don’t keep it updated.

Back on topic: as to the iteration, it was just 2 months ago that Elastic put out version 6.6, 17 days ago they added 6.7, and a day or two ago they put out version 7.0. They also have moved from elastic search hosted from version 2.1 to 2.2 in about the same time frame:

https://finance.yahoo.com/news/elastic-releases-elastic-stac…

Open source has advantages and disadvantages. One of the advantages is product features desired are thrown in your face, and R&D to provide those features is accelerated and much of the cost is allocated to to the community. Ergo, Elastic’s ability to continue to iterate on its platform.

Tinker.

7 Likes
19

I like this board because this is a community of fundamentalists. I am as well. But I recognize there’s something to be said for technical analysis, especially if you are focused more on short term trading. While the fundamentals should count for everything in the long run, on any given day a stock is only worth what somebody is willing to pay for it. The current price is, in part, a measure of the levels of fear and greed at play in the market, the degree of confidence investors have.

Yesterday was a down day for the markets overall, but even in that climate not all boats will float with the tide. TWLO and OKTA were up.

Today was an up day across all markets, but ESTC was down. That means nothing to me long term, but it can mean everything if you are looking for an entry point or focused on day trading or short term swing trading. Short term I don’t feel there’s a lot of faith in ESTC, and barring any news it may just trade in a range for a while.

2 Likes
20

As of the end of last month, ZS and ESTC were growing gross profit at a rate only seen by AYX and MDB.

These four companies (ZS, ESTC, MDB, AYX) are all growing gross profit at a low 50% range. They are the cream of our current crop.

https://m.imgur.com/a/4BXjlan

As of today, their values are (via SA app)

ZS: 33.22
MDB: 28.66
ESTC: 23.96
AYX: 19.3

I would call this a wide range of valuation.

Let’s look closer at what Dreamer suggested, acceleration matters to appreciation

Accelerating Growth (Sauls reported price)

ZS (94% price increase)
MDB (100% price increase)
AYX (64% price increase)

Decelerating Growth
ESTC (33% price increase)

I could see how this matters

HOWEVER

If one looks back, what one quickly discovers is that the price appreciation and performance is more closely tied to recent IPO action and the taking of profits early on.

I more strongly suspect that ESTC will see strong price performance moving forward. But they may sport a bit of a handicap with folks wondering where decelerating growth will flatten and hold.

Again, these are all the cream of the crop. It’s an interesting practice. One that would be worth visiting in 6 months.

As a personal conclusion, I think the values given to MDB and ZS reflect a lightening fast product adoptions (ATLAS) and a game changer technology with no competition (ZS).

We have the good problems folks.

18 Likes