Can Elastic have it all? Or a piece of it all? Is this company simply set up wrong? (Open source and all?) Or does the consistent 60%+ growth mean that they are offering something that customers need and want, and that the holistic solution could potentially be the best? Or that all could play nicely together (after all, DDOG uses Elastic’s code)
More questions than answers…I’m sorry about that. But it’s a confusing landscape to me.
As I wrote yesterday in my review, ESTC concerns me the most. Here’s what I wrote:
ESTC (6.2%): ESTC’s growth has been stable around 60% for 3 quarters and next quarter’s guidance suggests that this will continue. No complaints there. They are not moving toward profitability. I also see possible cracks in the strategy. As I understand it, ESTC is the leader in logging and they are trying to leverage this to gaining traction in other areas. Is a common stack compelling for a customers when the other these other offerings (i.e. other than their logging product) are not the best? For example, for endpoint protection, why would a customer choose ESTC when CRWD is the best? ESTC seems to be trying to get customers by offering a lower price and a common stack. I’m not convinced that this will work out for ESTC, and could it be a reason why ESTC is not improving its progress toward profitability (i.e. is sales and marketing cost going to be continue to be high because it’s a big effort to gain customers? CRWD seems to be getting customers so effortlessly). This has me questioning whether I should own ESTC. I expect them to easily beat next quarter’s guidance but I wonder whether ESTC will be relevant in the long run. I don’t think their logging product alone will get them where they need to be to show a profit. I’m not planning on adding and may consider reducing my position. I’d love to see some more debate about ESTC…
DDOG and CRWD are effortlessly, it seems, adding customers and rapidly moving toward profitability. Here are ESTC’s customer count numbers:
4/17 2800
7/17
10/17
1/18
4/18 5000
7/18 5500
10/18 6300
1/19 7200
4/19 8100
7/19 8800
10/19 9700
Growing nicely and growing steadily. I understand that customers want ESTC’s logging product. ESTC wants to branch out but I am skeptical that they can be successful. I believe that ESTC needs to be able to sell modules outside of logging to become a profitable company. Let’s look at the Sales and Marketing spend together with the added customers:
Period Cust Added S&M($M) Spend/New Cust
4/17 2800
7/17
10/17
1/18
4/18 5000
7/18 5500 500 28.5 $57K
10/18 6300 800 31.8 $40K
1/19 7200 900 19.7 $22K
4/19 8100 900 40.3 $45K
7/19 8800 700 47.1 $67K
10/19 9700 900 49.4 $55K
The S&M expense excludes share based comp. This is a very rough way to look at S&M efficiency and one might point to flaws (e.g. annual expense of user meetings, customers of varying spend and value to ESTC, etc.). Nevertheless, I think it’s good enough to get a picture of a company that is not gaining efficiency. To me this is not a good sign because 1) customers are accumulating so old customers should not cost much and 2) the percentage increase in customers added is declining. Again, selling multiple products/modules when a new customers is gained is a great way to increase S&M efficiency. CRWD is doing this with more than 50% of new customers now buying 4+ modules at the beginning. The lack of progress toward profitability is one of the main reasons why Saul doesn’t own ESTC. I think one has to believe that ESTC will be successful in their effort and their strategy to sell multiple modules. The just bought Endgame so there hasn’t been much time for them to show success or fail. It’s an unknown and it’s one that makes me nervous. Not sure what I will do (I have a few days left in 2019 to book a loss on my ESTC shares to offset my other booked gains…). CRWD’s success in selling more modules to new customers has now been proven. And since it seems to me that CRWD and ESTC will be competing in the EPP segment, I’d prefer to go with the proven winner.
Chris
