ESTC went public in October 2018. Its 52-week high is just over $100. The stock dropped down about 20% in late February/March and mostly traded in the low/mid $80s until June when it dropped further into the low/mid $70s.
There was a lot of analysis on the company done on NPI mostly by Tinker and Duma. Financial metrics have been consistently solid. Great revenue growth (above 60% for 8 quarters). Great and consistent net dollar retention (130%). Great customer acquisition (62%). Growing deferred revenue balance ($171M up from $103M 12 months prior). A big jump in calculated billings in the most recent quarter ($115M compared to $73M in the quarter a year prior and $80M in the previous sequential quarter). A very rapid pace of new product/feature introduction. The march to profitability is the one aspect that still seems uncertain. In summary, the results are up there with the likes of ZS and MDB (except for a clear path to profitability).
When you compare the financial metrics to the other SaaS companies, ESTC seems like it should have been worth much more than $80. There was the IPO lockup expiration (a temporary situation) and fears about Amazon open source. The hypothesis was that the stock price dropped for one or both of these 2 reasons. The lockup would pass so if that was the cause then the stock should rise after the insiders finally sell their shares. How real is the Amazon threat? Some sleuthing by Ethan showed that there has been virtually no activity/interest in the Amazon alternative in the open source community. The hypothesis then is that the Amazon threat is not really a threat. If not real then it will be proven by continued excellent financial metrics performance (more of the same will be good).
If one buys into the above then ESTC was a clear buying opportunity when it was trading in the low/mid $80s and certain when it was in the $70s.
So where are we today? The shares started rising from a local low of around $73 at the end of June to about $98 today. Between July 10-15 there was somewhat elevated volume. I also found it very interesting that ESTC was rising (and continue to rise) every trading day even on days when other SaaS are down. This is continuing with today being another example. What is happening here? Is it all due to the lockup expiration? Is it institutional buying? Is it a steady process of ESTC rising to a valuation that is similar to the other companies in the cohort with similarly strong financial metrics? If it is the latter then we should expect the shares to rise to about $120 after the July quarter results get reported in about 6 weeks (assuming all things being equal and without a sector or market selloff).
I bought most of my shares in March/April. In late June (taking the above hypothesis to heart), I also bought a sizable position of the November $80 calls financed by selling $90 July puts when the share price was around $80. As a result of this trade working out (short puts are gone from my account and the calls are worth substantially more)…so far…my position has grown to a 7.7% allocation (including the options). When I bought the shares in March/April, I thought they should be worth more like $100. When I entered the options trade, I thought they might well rise to around $120 by late Summer/ early Fall 2019. I still think that this is a likely scenario. I think I will still let this play out at least until the early September. However, given the uncertainty of the path to profitability, I will watch my allocation and likely trim back my position as the stock rises further.
There are two issues you have not covered, Open Source and SaaS. dumaflotchie covered the first, and Greytab the second:
That is NOT a man who is dismissing this threat…there is clear concern here and their S1 specifically stated that barriers to entry are lower due to the open source.
Earlier this week, Amazon Web Services announced Open Distro for Elasticsearch — its own version of Elasticsearch, an open source software project created by publicly-traded software company Elastic. Notably, this Open Distro includes several features for Elasticsearch that normally can only be found in Elastic’s paid, premium version of the software.
Note I’m not talking about the so called “SaaS” that shows up as revenue in ESTC’s income statement. ESTC counts Elasticsearch Service as “SaaS”. But that’s really just hosted service, still very much a “build it yourself” approach. It’s more akin to IT infrastructure/platform (see notes for various product lines). What I mean by “SaaS” here is end users getting the application functionalities without having to interact with the underlying infrastructure stack. Think of SaaS like SalesForce, like Workday
I believe these two issues are what killed ESTC’s price not the lockup. If Main Street proves these worries wrong, Wall Street will follow suit and bid up the price.
GC,
I have been running around with the ESTC flag pretty aggressive, and was calling the held-down price as being due to stock lock-up expiration. Normally we have found the lockups aren’t that big a deal, but I think the confusing nature of this particular lockup was problematic.
25% of the insider shares could be sold in March (I believe).
Then depending on what you read, it sounded like the remaining 75% could be sold in April. But there was a giant catch in that due to the quiet period the 75% actually couldn’t be sold until 3 business days after the June ER release. That was June 10th. Selling/volume increased, hitting a low on June 26th, and been up about 30% since then.
I originally saw a lot of comparisons to ZS.
Both IPOd at mid-20s P/S or higher…very expensive out of the gate. Both hit another plateau and then did nothing for a while. ZS was flat from June 2018 to Jan 2019, for example.
So I expected ESTC to blow up eventually, but the lockup and resulting negative trend got the algos and trend traders all piling on, and many thought they must have had a bad ER (when they had a good one, imo).
Anyway…currently it is my largest position, just edging out TTD.
Upside:
They forecast 49% growth for full current fiscal year, which is higher forecast % growth than most are willing to commit to, 4 Qs out. That would be about $403m, and I see beat-and-raises leading to a likely $425m or more revenue for full year. They would report the current full year around June 2020, or under 11 months from today. Currently they are at a 27 P/S after their big run-up, putting them just shy of being an equal multiple to MDB as a comparison. Even if their multiple compresses to 25, that would be about 43% upside in the stock the next 11 months, from today’s prices. That is what my trusty napkin math says, which is worth about a penny considering I am a random guy on the internet.
My guess institutions buying back in now that lock up is up.
Open Distro from Amazon played out months before. Not a threat, even less so now. No one thinks it’s a credible threat. Even less so months later with virtually no interest.
I agree that now it quickly goes above its previous ATH and then behaves like the rest of our stocks and follows fundamentals, which are great. Was buying pretty heavy in the 70s and 80s and now it’s a full position with this recent action.
You can see trading volume pick up at the beginning of March and a corresponding fall from its all time high. This was the first lockup expiration.
Eventually trading volume died down but the stock drifted lower still. Until the second lockup expiration, trading volume swelled up again until July 8. That was I think the signal everybody was waiting for. Because then trading volume swelled up again but the price skyrocketed.
I did pick up a position during this rise but note volume is going down again. But to me it’s clear the lockup expiration was key to changing perception on this stock.
I know this board is not in favor of Technical Analysis, and neither am I, but when you look at the price and volume on the chart it’s clear what was going on. While I’m not proposing looking at chart patterns it may be useful to look at IPOs and how they respond to lockup expirations. Several people have commented that the ESTC has been/will follow the ZS trading pattern, but ZS had its lockup expiration on 9/12 and there was no corresponding swelling of trading volume around then. So not sure how useful it will be. May have to factor in how many shares go public at the time of IPO. ESTC has a LOT of restricted shares and options.