Observation on Elastic

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I’ve been fascinated watching our stocks take turns recovering over the last month or so:

In March, Crowdstrike recovered from insane lows ($33ish) and ended the month up 10%+ YTD.
Then in early April, Alteryx recovered from insane lows ($80ish) and is now up 15%+ YTD.

The last couple weeks we’ve seen ROKU go on a huge run, and it’s up about 40% in April but amazingly it’s still down YTD.

Still, all these bounces make it clear to me that the market has realized our stocks can survive and even thrive in the current environment.

One other like ROKU that’s still down YTD is Elastic, notable because it actually started 2020 very low, after trading above $70 and usually in the $80 to $90 range for most of 2019. At $60 I see it as a coiled spring, even though it’s up from it’s ridiculous March lows near $40. When it comes to ability to succeed in the present environment, I don’t see how they are different from our other companies. Despite some folks having concerns about their pricing, the business continues to grow rapidly, so I just don’t see the bear case. I think the stock has to move up eventually as the business grows. I wouldn’t have expected it to be last to make YTD highs, because it’s never looked expensive, but I haven’t been able to time any of these bounces.

I already had a large position, and it’s not as high confidence as my top positions (AYX at 23% and CRWD at 18%), but I have added. ZM and ESTC are also large positions for me, around 13% each. ROKU is getting larger too, at almost 9%.

I’m no Nostradamus, but it certainly wouldn’t surprise me to see Elastic have a large bounce at some point like we’ve seen for these others.

Bear

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It looks like Elastic is building out a really capable Security platform.

Here’s a vendor comparison from a MITRE ATT&CK evaluation. I don’t understand a lot of the jargon but Elastic performs consistently at the top across all of the evaluations.

https://www.elastic.co/blog/mitre-round-2-APT-emulation-vali…

It’s a crowded field and they are in a basket of best in breeds here. I think their platform approach will get a lot of traction across use cases, and this is just one more revenue stream for the Elastic platform.

ESTC stock has not been performing in accordance with the company performance for some time. I can’t but think at some point it will, so I remain at a moderate position.

Darth

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I have a feeling Elastic in OP is not what I think it is.

I clicked on this because it is hard to get elastic for protective face masks. I’m in a smallish college town and we have churned out thousands of face masks. This is happening all over the country (I even heard the Amish are making them for a profit).

But if you are an investor, I recommend you find out who is making elastic in the US. Because they are ramping up and it will continue until there is a vaccine. (Maybe beyond? life as we knew is it changed forever).

I also think what few manufacturers of clothing and other fabric (especially) still exist in US will also be needed for several years. People here are buying hundreds of yards of fabric, too. Maybe that manufacturing will make a permanent comeback. Oh, and people in my groups are now buying tshirts in bulk and making strips for tieing the masks. Why can’t the manufacturers just sell the strips instead of everyone having to make them usable? Just saying!

p.s. I ordered 450 yards of elastic two weeks ago and it still hasn’t shipped. I haven’t bought elastic in many, many years. Every seamstress with a sewing machine is breaking them out, sewing, sewing, sewing. I think a very small, local shop near me is actually doing a booming business in selling machines as well. I wouldn’t be surprised if some manufacturing of sewing machines also increases in US - even if that manufacturer never made them before.

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It looks like Elastic is building out a really capable Security platform… It’s a crowded field and they are in a basket of best in breeds here. I think their platform approach will get a lot of traction across use cases, and this is just one more revenue stream for the Elastic platform. ESTC stock has not been performing in accordance with the company performance for some time. I can’t but think at some point it will, so I remain at a moderate position.

Hi Darth,

I usually don’t comment on Elastic any longer since I exited it, because I don’t follow it any more, but here’s something I just don’t understand:

All of the past year I’ve heard lots of people extoll the virtues of this company, but if you look at a stock price chart and set it at one year, all you will see is a series of peaks and valleys with each peak lower than the one before, and each bottom lower than the one before. In other words it keeps drifting down, down, down, down… in a market that has been generally good to all the rest of our stocks. The graphs your article includes say that Elastic has good detecting results. So what is the problem? Hard to set up? Hard to use? More hands on service required? Poor company service? Company not moving towards making money? I don’t know, I’m just curious and wondering because it’s a very odd stock graph for a company that we are following. We just don’t see many down, down, down, down, graphs like that. It’s hard to believe that the whole investing community doesn’t understand what is going on, on a continuing basis. I personally don’t understand it. I do remember from when I was in it that the CEO was more interested in the ideology of being pure “open-source,” than in the company being profitable. Perhaps that is part of the problem?

Best,

Saul

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I’m not Darth, but…

I’m just curious and wondering because it’s a very odd stock graph for a company that we are following. We just don’t see many down, down, down, down, graphs like that. It’s hard to believe that the whole investing community doesn’t understand what is going on, on a continuing basis. I personally don’t understand it.

Couldn’t you say the same about Twilio from September of 2016 to December of 2017? It finally started going up (from around $25) in January of 2018 and acted very differently after that! I would say the investing community didn’t understand what was really going on – until suddenly they did.

So what is the problem? Hard to set up? Hard to use? More hands on service required? Poor company service?

None of this seems likely since they continue to grow revenue at about 60%. I’m not buying into a turnaround story here. ESTC’s results have been solid, great even. If anyone can point out something I’m missing, I’m all ears. Otherwise I’m willing to wait until:

a) The stock price recovers
or
b) The financial results change

Bear

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Couldn’t you say the same about Twilio from September of 2016 to December of 2017? It finally started going up (from around $25) in January of 2018 and acted very differently after that! I would say the investing community didn’t understand what was really going on – until suddenly they did.

Isn’t that around the time that TWLO lost Uber?

If I’m determining that the market is wrong about something, I’d prefer to know what the market’s reasoning is for pricing something lower than I think it’s worth and why the market is wrong.

With TWLO it was the loss of Uber hiding growth of the rest of the company. With MDB you had the AWS “competition”. ZM, the perceived security risks. AYX, the issue of not being “cloud” based (which I think is completely irrelevant).

I’m in medicine. If someone asks me whether someone sick is going to be OK, I wouldn’t feel comfortable saying yes or no unless I could figure out what was wrong. In this case, ESTC is “sick” and unless I can diagnose the problem I can’t tell if the problem is temporary or terminal.

Information is too widely available for things to just be hidden from the market. If I can’t figure out what issue is holding back a stock, I can’t make an assessment on the validity of that issue.

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Information is too widely available for things to just be hidden from the market. If I can’t figure out what issue is holding back a stock, I can’t make an assessment on the validity of that issue.

Based on posts here and elsewhere, I had the impression that ESTC suffered from a lack of earnings and that their spending policies precluded near term positive earnings. In fact a few believed they’d never catch up.

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Company not moving towards making money?

That’s one of the main reasons I don’t own it (Q4 and FY is current guide):


non-GAAP Operating Income					% Revenues					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017					-$27.52		2017					-31.2%
2018	-$6.16	-$3.54	-$8.04	-$14.22	-$31.96		2018	-19.5%	-9.6%	-19.3%	-28.7%	-20.0%
2019	-$11.66	-$14.83	-$11.73	-$17.48	-$55.70		2019	-20.6%	-23.3%	-16.6%	-21.7%	-20.5%
2020	-$24.27	-$18.41	-$20.16	-$24.40	-$86.75		2020	-27.1%	-18.2%	-17.8%	-19.4%	-20.5%

non-GAAP Net Income						% Revenues					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017					-$51.97		2017					-58.9%
2018	-$7.85	-$5.27	-$8.69	-$17.52	-$39.33		2018	-24.8%	-14.2%	-20.9%	-35.3%	-24.6%
2019	-$12.49	-$16.91	-$11.15	-$20.47	-$61.03		2019	-22.1%	-26.6%	-15.7%	-25.4%	-22.5%
2020	-$24.09	-$17.17	-$22.22				2020	-26.9%	-17.0%	-19.6%	0.0%	0.0%

non-GAAP Free Cash Flow						% Revenues					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017					-$16.95		2017					-19.2%
2018	$0.46	$3.58	-$2.79	-$25.03	-$23.79		2018	1.4%	9.7%	-6.7%	-50.5%	-14.9%
2019	$4.79	-$1.41	-$9.88	-$20.88	-$27.38		2019	8.5%	-2.2%	-14.0%	-25.9%	-10.1%
2020	-$3.28	-$1.36	-$24.23				2020	-3.7%	-1.3%	-21.4%	0.0%	0.0%

I see all the tech accolades, but I can’t get past:

  1. the above performance,
  2. an increasing product line that strikes me as possibly having a finger in too many pies,
  3. and a pricing structure that never seems to improve the bottom line even at 60% growth.

I’m not saying ESTC won’t work out, but that’s why I’ve chosen to pass. I still hope everyone in it makes gobs of money.

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In this case, ESTC is “sick” and unless I can diagnose the problem I can’t tell if the problem is temporary or terminal.

Information is too widely available for things to just be hidden from the market. If I can’t figure out what issue is holding back a stock, I can’t make an assessment on the validity of that issue.

I have to disagree. We haven’t historically been very good at telling whether the problem is temporary or terminal even when we can diagnose it. When Pivotal and Nutanix and Talend were market laggards, we diagnosed slow top line growth, but we thought it was temporary because they had “camouflaged growth.” We were wrong. Some of us thought Hortonworks would out grow its cash flow problems, but we were wrong there too. Having a diagnosis doesn’t necessarily help. That said, my diagnosis is that the market got spooked on ESTC when they reported on December 4th and calculated billings were low. It’s been weak since then. But the billings bounced right back when they reported the next quarter. They reported in February and it was a very strong quarter. However, well, you know what’s happened since February. An ESTC recovery never had a chance to get going.

Still, I believe that diagnosis to be no better or worse than the ones we had for Talend or Pivotal or whatever. So I ignore it and I follow the financial performance of the business, not the stock price. Feel free to disagree, but this seems to work a lot better for me.

Bear

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When Pivotal and Nutanix and Talend were market laggards, we diagnosed slow top line growth, but we thought it was temporary because they had “camouflaged growth.” We were wrong. Some of us thought Hortonworks would out grow its cash flow problems, but we were wrong there too. Having a diagnosis doesn’t necessarily help.

It’s still possible to be wrong but at least I take comfort in being able to make an assessment. To take the analogy further, I feel like with NTNX they had two issues: suppressed growth rates due to pass through hardware revenue elimination and poor sales. Like a patient who has pneumonia but also cancer. We diagnosed the pneumonia and felt they would recover from that but missed the much more serious problem.

It’s certainly possible that your assessment that the market has held back on ESTC because of the issue with billings is correct, or as other have suggested it’s the concerns regarding profitability and spending. I guess I didn’t fully grasp your diagnosis from the original post. Accepting the premise of your diagnosis, it’s certainly a reasonable thought process.

I personally feel it is more due to lack of clarity regarding future profitability, and I’m not convinced the market is wrong. It may be because of DDOG, but I worry that ESTC will keep developing new products but someone else will take their tech and sell it better.

I like to consider market performance as kind of crowd sourced information. It’s not everything, but it gives a general idea of what institutions and money managers think at least to some degree. Just like I consider arguments by individual posters for or against a stock on this board, I have to consider the the overall assessment of the market as well.

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As an investor if a company is showing flat or very slow progress on bottom line I want to know what I’m getting for the money the company is spending. The diagnosis by another name.

For one slowing S&M expense. While rising revenue growth, which is rising faster than S&M.

Second Elastic has been building a platform over a few years now that is producing best in breed products that are easy to use, best in breed, and well received by developers. Leader in some of those markets.

But what’s really important and related to last paragraph. SaaS is bringing this best in breed platform to an easily consumable format. But it was small when we first covered it. $10M a quarter and growing 70% or so. Well now it’s $25M and growing 114% a quarter. So is the expense worth it? It’s not cheap to build a SaaS empire.

Elastic SaaS now avail London Azure: April 20

Now avail South Carolina Google Cloud: April 13

And so on. Every few weeks they expanding something. The platform or the reach of the service. That’s the diagnosis. Growth of the size of their reach and availability and the breadth of the reach of the platform.

Darth

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Couldn’t you say the same about Twilio from September of 2016 to December of 2017? It finally started going up (from around $25) in January of 2018 and acted very differently after that! I would say the investing community didn’t understand what was really going on – until suddenly they did.

Here is the difference, back then Twilio ran into the problem of customer concentration, and in particular Uber deciding to reduce their use of Twilio. It caused great angst and defeated expectations that Twilio was irreplaceable.

At this point in time there is no such negative factors facing Elastic’s business. No major customers leaving, worry about viability of the product or any such thing. Elastic keeps doing what it is doing, but unlike everything else it keeps doing as Saul indicated.

Thus, my conclusion is that unless something new happens, Elastic is not going to recover on its own superior to other stuff you can own that is discussed here. Now what new is there?

Elastic has finally started to focus its business more. 3 areas: observability, security, search. Of the 3 observability is emphasized as their largest opportunity (they face huge competition here, with Datadog, Splunk, New Relic, and the like). Security is also a huge area. They face huge competition here with Crowd, Splunk, probably Datadog in the near future) and many others. Search is the smallest opportunity, and surprisingly, enterprise search is a new product for Elastic, and again they ace a lot of competition here.

As Datadog and Crowd have shown, is that being laser focused you can have product adoption almost as if there was no competition. Elastic is doing this differently. Their competitive advantage is NOT laser focus, but instead forget best in breed as we can give you the entire product with one vendor.

When Elastic’s strategy starts creating huge demand for their SIEM or observability product (like is seen with Datadog or Crowd (at much greater dollar printing efficiency) then the share price will take off.

Until then one vendor > best in breed is not registering with the stock market, and thus probably not threatening (as of now) to increase Elastics dollar printing efficiency potential).

Elastic is new with some many of these offerings, thus there is hope that this will happen. But as we have discussed, it seems difficult for Elastic to compete as best of breed. They therefore have to compete on being cheaper and having developers just use Elastic because Elastic is already used in some departments for some purpose (so might as well expand its use to other departments).

Makes one wonder, is that really a good strategy? Because Dept A uses Elastic for search, does that mean that Dept B will naturally adopt it for security? That seems to be the primary strategy.

Tinker

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All of the past year I’ve heard lots of people extoll the virtues of this company, but if you look at a stock price chart and set it at one year, all you will see is a series of peaks and valleys with each peak lower than the one before, and each bottom lower than the one before. In other words it keeps drifting down, down, down, down… in a market that has been generally good to all the rest of our stocks.

Saul,
You are absolutely correct. The stock, NOT the company, has underperformed the last 1 year. I am not sure you saw a thread I posted last week where Peter Offringa did two great articles on DDOG and ESTC. I highly recommend it to anyone owning any of the 2 names. Peter seems very knowledgeable in the sw space.

https://softwarestackinvesting.com/datadog-ddog-stock-analys…

After reading both articles I came off with a much better understanding of ESTC that I bought back what I had sold at $46 at a loss! At the bottom of the above link, I (I go by Kurt there) had a discussion with Peter which addresses your question. I am posting here with some more color. With regards to ESTC stock price, I think the market has the following issues:

  1. Overhang of lawsuits with Amazon - ESTC sued Amazon for using the same name and also the Search guard product. I don’t the outcome of this lawsuits even if negative will impact ESTC.
    https://www.elastic.co/blog/dear-search-guard-users-includin…
  2. Poorer operating margins and FCF when compared to faster peers - There is some concern but remember SMAR and MDB with slower growth has 70% higher P/S than ESTC! So, this can’t be it.
  3. Perception that AWS makes more $ of their hosted OS Elastic search version. AWS has not really accepted ESTC the way it has accepted MDB for instance - ESTC is getting better and better compared to the OS product that AWS has.
  4. Amazon Open distro - This thing is 1 year old and created to compete with ESTC proprietary but free and paid features. This is the version that AWS has bolted on the Searchguard tool on. But ESTC is still growing at 60%! So, clearly Opendistro has not slowed down ESTC growth.
  5. Feeling that DDOG will eat it’s lunch – ESTC the stock has struggled since DDOG IPO. If you read both articles, Peter believes and argues well that ESTC is more stickier than DDOG even though DDOG product is better out of the box. I feel both companies have good prospects. ESTC customers like it because it gives a lot more freedom. ESTC communities are viral all over the world. If you google you will find within 1 hour of any metro! You cannot say that of many companies that we own.
  6. There was the concern of the slowing billings last Q but that was addressed in most recent Q so a non-issue.
  7. Open source companies cannot make money - ESTC SAAS product is all paid and is 22% of total rev growing at 110%/y. Yes, it’s basic version is quite good but the paid subscription plan gives alerts, reports all essential for observability. If you read some of the customer testimonials and videos - see the ones by BOX, and VW for example you will get an idea why they are paid customers. Not possible to use the free basic version at that level.

So, in mid March after sitting in Roku and LVGO for a while I trimmed them as I felt I should get into higher confidence positions like DDOG. But both companies have roughly doubled since then! I don’t know what will trigger ESTC. It is reporting around early June and maybe they will give a full 2021 projection as they are currently in their Q4. This may be good and bad. I am going to hold my position size at least till then.

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Great discussions…
IMO - there are three issues with ESTC.

One is cash flow - this one is easier to understand… investing into cloud services and showing this amount of growth takes cash… I think this will go away in 2 to 4 quarters

Second is billing - management explained billings is lumpy and therefore not a good measure… however, cloud / SAAS investors are very very used to look at this measure… and it is not easy to explain away…
I believe part of the issue here is also growth of cloud services which may be helping revenue but more monthly basis so hurts billing in near term…

Third - as someone says - ESTC is not seen as best of breed in one area… it is more of a underlying infrastructure story really oriented to developer community… this also means somewhat slower growth than best of breed like DDOG… however I think this will also mean larger market opportunity and longer term sustained growth…

So I believe none of these three will see huge improvement in next couple of quarters which means ESTC stock may continue to trade water… unless ofcourse the cloud service accelerates much faster… in either case, I think this one is like TWLO where at some point its story will become much more apparent and convincing… over a period of 2 to 3 years, this can prove to be very strong investment.

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