What happened this quarter
There has been pretty good discussion here on the ESTC quarter. My summary:
- the somewhat gradual slowdown in revenue continued
- there was improvement in the operating losses and more on the way
- the guidance was horrible, but they’re probably being overcautious
My thoughts and what I’m doing
ESTC’s results were just ok, while Datadog’s and Crowdstrike’s were sparkling. Is that likely to change? Is Elastic just always going to be little brother to these, and to struggle?
ESTC’s valuation is still less than others (although it has doubled since mid-March lows), but I see no reason why ESTC’s PS multiple would expand. If you believe it will, there’s your case for ESTC. But growth has been slowing consistently. If it really slows to 35-40% I think the shares will get hit hard. If it only slows to 45% or so (like we might have expected anyway) then shares will probably plod along.
But here’s my minor epiphany for the day:
CRWD has a PS of 35 and 85% growth
ESTC has a PS of 17 and 53% growth
Let’s say you think both will slow down gradually. So maybe their PS ratios both drop slightly or at least don’t expand. That would mean you still get a CAGR of something like 75%+ from CRWD over the next few quarters, and less than 50% from ESTC!
I said it was minor. Still, I think ESTC has earned itself a smaller position from me. Bottom line: I used to think ESTC’s PS would expand to be at least close to some of our favorite companies. Now I do not.
I sold a large portion of my ESTC, and I will consider whether or not I can find something better to replace it altogether.