ESTC does a FSLY

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Hi all,

Long time ESTC shareholder after bringing to the board pre-IPO, which hasn’t been a superb investment. Perennially under appreciated vs it’s peers (MDB!), I thought the risk/reward profile was worth having. Prior to the tech meltdown, they had had a mixed 2021, but plenty of trading opportunities.

They’ve just announced a change in management, with the CEO Shay Bannon moving to the CTO role, and Ashutosh Kulkarni (ex McAffee, Akamai, Informatica) and current Chief Product officer moving to CEO.

I sold everything after hours. My thinking was:

  1. No longer founder led.
  2. CEO transition = there is a problem to be solved, and founder cannot solve it.
  3. New CEO needs to solve the problem.
  4. Can new CEO solve the problem? Remains to be seen, and no real indication that he has solved ESTCs problems previously = Uncertainty.

ESTC has been a long-term underperformer, despite reasonably good performance and a comparatively low market cap. In hindsight, I could point to sub-50s growth, confusing sign-up process, and less-than-awesome go-to-market.

But if I try to take one learning that’s not clouded by hindsight ESTC always had a sense of friction. Being a bit harder to say yes to than it should have been.

Fortunately this development comes after the big tech meltdown, so will (perhaps belatedly!) be deploying the funds into other stocks that are markedly cheaper than a few months ago.

I’ll continue to watch ESTC to see if the new CEO can remove that sense of friction.

cheers
Greg

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No denying it’s been an under-performer in terms of stock price, but the company has not done poorly, it’s stock has. The CEO is going back to being the CTO, because frankly, he didn’t like being CEO. He was the CTO prior. Not every founder is going to be a great CEO. But as CTO, he will still play a key role.

I find this change to be quite the positive move. Kulkarni is very well thought of in the VC community.
What needed to be “changed or solved” is the CEO role. I would also suggest they need to make some changes such as the GTM strategy and make sales a bit more efficient.

Much like MongoDB, the transition to the Cloud creates some complications when analyzing the numbers. Service revenues are still too much of the overall component for a SaaS company.

Look at the EV/S valuation of under 10x right now, top line growth of 40-50%, with a positive FCF margin and a DBNER of 129%. More importantly, their Cloud portion of revenue is on fire (sounds like MDB a few quarters back), accelerating but still less than half of their total.

And then look at Mr. Kulkarni’s success track record. Kulkarni is a superstar in Silicon Valley and I’d expect him to make some things happen in a hurry. He’s only been with ESTC for less than a year. I think he probably knows what needs to change.

So yes, without the company stating they are having a great quarter, I’d think there was a problem here. But given the statement, I doubt that is the case. At this price, I really think it’s a lower risk way to play several areas of the SaaS market, and this change is welcomed.

Short time ESTC investor. Certainly some risks ahead, but this looks nothing like Fastly. It probably falls a little short of a “Saul Stock” with barely over 40% growth here, but the runway is long and there’s many areas to exploit a very large TAM. Coupled with EV/S that has been decimated and positive FCF, I like the direction from here.

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I agree with MFChips that the CEO change is a welcome change and I will also add that revenue is poised to majorly re-accelerate in the upcoming quarter.

The CFO stated that over the last 2 quarters, they have hired more sales and marketing personnel than they have ever did historically - and by a huge margin; and they see it bearing fruit in a huge way from its fiscal 3Q onwards (i.e. Feb 2022).

This will be a case when a revenue re-acceleration meets a historically low valuation.

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Thanks MFChips.

I’ve followed Elastic since pre-IPO, and I’d say the company hasn’t done great overall.

ESTC is playing in the same space as DDOG, but has never hit that level of execution. It seems to have all the bits in place to do really well, but hasn’t. In an expanding market, with COVID tailwinds, it didn’t struggle, but it didn’t excel. Even if we say DDOG is extra special, ESTC hasn’t kept up when the rising tide should be lifting its boat without a lot of hassle.

That’s kind of what I mean by friction. As a long-time user of ElasticSearch, signing up for the cloud service is a hassle. You have to spec your servers, and blah blah. Datadog you just install the agent and box is ticked.

“He didn’t like being CEO” - My take is that he didn’t like it because something was wrong that he couldn’t fix. Do CEOs quit their job in companies that are firing on all cylinders?

The new CEO for me is an unknown quantity. I haven’t seen any evidence he’s a “superstar in Silicon Valley” - McAfee, Akamai, Informatica are very early 2000s. Not exactly FANGM, or any of the cloud-based up and comers well known to this board.

Can this change fix the problem? Maybe. I’m selling because for me, the uncertainty and hence risk just went way up.

I’m modelling $225m in revenue which would be very mild acceleration. If they hit that, I might revisit.

cheers
Greg

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