Tag: ESTC

Elastic’s Ambitious Growth Plan

January 3, 2023 / poffringa

I haven’t written about Elastic since late 2020. I held a position in 2020, but shifted my allocation to Datadog in 2021. At that point, it was becoming clear that Datadog was emerging as a leader in the observability space. While I still maintain a large portfolio allocation to Datadog, Elastic may provide a favorable return over the next two years, if they can execute on their aggressive growth plan and FY2025 financial targets.

At their Analyst Day in September, the leadership team set an ambitious growth target for $2B in revenue by FY2025. As we are halfway through Elastic’s FY2023, this represents roughly a 2x increase in revenue within 2.5 years. When the leadership team presented the model for this target, they projected a revenue CAGR of 36% to reach it. That would be an acceleration from the current growth rate in the low 30% range.

Additionally, this target comes with profitability improvements, anticipating a couple percentage points of growth each year for adjusted operating and FCF margins, over their roughly break-even state at the time. As ESTC stock appears reasonably valued with a P/S ratio just below 5, these targets might allow for a positive return over the next 2-3 years.

Of course, the macro environment and softer IT spend could hamstring these plans. Elastic’s most recent quarterly report for Q2 FY2023 issued a month after the Analyst Day made these targets appear more challenging. Yet, the leadership team didn’t reset them. Given their exceptionally high net expansion rates for large customers and particularly among new Elastic Cloud users, they might just get close.

Evolving Architectures for Transactional Data Storage

January 18, 2021 / poffringa

Much has been written about how enterprises are awash in data, generating new signals at an accelerating rate. A lot of this focus has been on the data analytics and machine learning space, where arguably a large opportunity lies. Businesses are struggling to process all their data in order to gain new customer insights and improve performance. Recent IPOs like Snowflake, C3.ai and Palantir have driven investor interest and delivered valuations that reflect the huge potential.

While these opportunities in big data convergence, AI and advanced analytics are exciting, an equally significant evolution is happening on the transactional side of data storage and distribution. Models for data storage have moved far beyond a single large relational database housed on premise. Application architectures are evolving rapidly, with the return of rich clients, disparate device channels, an ecosystem of APIs and breaking up monoliths into micro-services. Cloud hosting and serverless have provided new ways to manage the runtimes that execute code. Software engineering roles have been coalescing, highlighted by the ascendancy of the developer and a bias towards productivity.

These forces are creating opportunities for emerging technology providers to capture developer mindshare and power application workloads. Cloud-based services have lowered the barrier to entry for launching new transactional data storage solutions. In the same way that Snowflake created a robust offering separate from the hyperscalers, independent data storage companies are thriving on the transactional side. This blog post provides investors with some background on application data storage technologies and an examination of trends in modern software architectures. It concludes with a survey of companies (several that are publicly traded) which stand to benefit as application workloads explode.

Elastic (ESTC) Q2 Recap

December 13, 2020 / poffringa

Elastic announced Q2 FY2021 (Aug – Oct) earnings on December 2nd. The results were well ahead of expectations, with significant beats on both revenue and EPS. They also delivered a meaningful improvement to profitability measures, with non-GAAP gross margins ticking up 2.5% and operating margin almost at break-even. Next quarter and full year guidance were raised about 5-6% as well, but still reflect some conservatism due to the macro environment. The market reaction to the results was positive, with the stock spiking 12.6% on December 3rd and climbing another 6.1% the day after. On the earnings call, the leadership team provided updates on customer wins and their broader go-to-market strategy. Elastic’s rapid product development cadence continued with a major release in November, that included searchable snapshots, RUM, synthetics and Kibana Lens.

Additionally, Elastic held their annual user conference ElasticON in mid-October. The event was packed with over 300 sessions and 25,000 user registrations. Most interesting were the many customer presentations, revealing the depth and breadth of usage of Elastic solutions within large enterprises. This underscored Elastic’s product strategy of usage expansion across multiple solution categories from a single platform with a unified, resource-based pricing model. In this post, I review Elastic’s Q2 earnings and other business updates that occurred during the quarter. I also examine product enhancements and Elastic’s general competitive positioning. For additional background on the Elastic investment thesis, interested readers can review my past quarterly updates and original deep-dive.

Elastic (ESTC) Q1 Recap

October 19, 2020 / poffringa

Elastic announced Q1 FY2021 (May – July) earnings on August 26th. The results were favorable, with significant beats on both revenue and EPS. They also delivered a large increase in FCF margin to 17% as well as a 24% improvement in operating margin. Next quarter and full year guidance were raised slightly, reflecting ongoing concerns around COVID-19 headwinds. The market reaction was muted, with a slight decline in share price the next day. On the earnings call, the leadership team provided other updates on customer wins and their broader go-to-market strategy. During the four months before earnings, Elastic delivered three major point releases with meaningful product improvements across all solution categories. Highlights included the new Workplace Search product and a Unified Agent with malware protection.

Additionally, Elastic held an Analyst Meeting on October 14th, which included further updates to their broader strategy. While no new financial targets were revealed, leadership provided interesting insights into large customer growth and expansion across multiple solution categories. This customer motion highlights the potential for Elastic’s long term growth, as some enterprise customers value the breadth of Elastic’s solutions and their unified pricing model. In this post, I review Elastic’s Q1 earnings and other business updates that occurred during the quarter. I also examine product enhancements and Elastic’s general competitive positioning. For additional background on the Elastic investment thesis, interested readers can review my past quarterly updates and original deep-dive.

Independent Software Providers and the Cloud Vendors

July 26, 2020 / poffringa

Early in the evolution of cloud computing infrastructure, the cloud providers were rapidly expanding their offerings. For a while, it seemed they would leave no room for independent providers in a land grab to address every segment of software infrastructure. As the landscape has matured and enterprises increasingly implement a multi-cloud strategy, it has become clear that independent providers can not only co-exist, but thrive, in this environment. Examples are Datadog for observability, Twilio for communications, MongoDB for databases and Fastly for CDN.

This blog post examines the history of cloud service providers and the evolution of their offerings. As cloud vendors have defined broad categories of software services, they have left openings for nimble, focused independent software vendors to leverage the same cloud infrastructure to deliver substantially better product offerings in some segments. From this, we can draw observations about why they are succeeding and what they need to continue doing. Investors occasionally raise competitive concerns for independent software providers that cloud vendors will choose at some point to crush them. I posit that threat has passed in many categories. This post seeks to help investors understand what has changed and how to reason about the risks going forward for their favorite independent software company investments.

Elastic (ESTC) Stock Q4 FY2020 Earnings Results Review

June 12, 2020 / poffringa

Elastic released their Q4 FY2020 earnings report on June 3. They delivered a strong beat on growth metrics and demonstrated profitability improvements. If judged based on Q4 metrics alone, the results were outstanding. However, management set forward revenue guidance lower than expected – inline for Q2 and 8% less for the full year. This left investors and analysts confused, particularly as management asserted that all top-line metrics were steady in May. Management attributed the reduction to general conservatism around macro conditions and the start of their fiscal year. The markets reacted by pushing shares down 3.8% the next day, after a nice pre-earnings run up. Sell-side analysts uniformly raised price targets and almost all maintained buy equivalent ratings.

Elastic (ESTC) Stock Analysis

March 12, 2020 / poffringa

Date of Recommendation:          March 12, 2020
Stock Price at Publishing:       $48.76
5 Year Price Target:             $170.00

Elastic (ESTC) stock should be considered for long term investment. I expect the price of Elastic’s stock to increase significantly over the next 5 years. Growth will be driven by their leading position as a generalized development platform for search, which in the broadest sense encompasses wide applications of data discovery. Their product development cadence has accelerated in the last few years, driven by thoughtful acquisitions and organic growth. Strong developer mindshare is supported by an open core software licensing model. Revenue growth has been consistently high with impressive customer expansion rates. The leadership team is strong, led by a technically-oriented founder and CEO. I expect the stock price to more than triple and exceed $170 within the next 5 years.