Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
It's been a little less than a month now since Elastic N.V. (NYSE:ESTC) went public -- and already the upgrades are rolling in.
Incorporated in Holland but headquartered in Mountain View, California, informational analysis company Elastic went public on the New York Stock Exchange on Oct. 5, pricing its shares above expectations at $36 -- and then watching those shares nearly double in price on their very first day of trading! Today, Elastic stock is rising on the back of four simultaneous buy ratings just announced on Wall Street, where the quiet period on the company's underwriters has just expired. Elastic shares are up 8% as of 1:56 p.m. EDT.
But what is Elastic, anyway? And why do some folks on Wall Street like it so much? (And why do other analysts on Wall Street no longer like Elastic very much at all?)
Read on to find out.
What is Elastic?
If you haven't heard of Elastic yet, no one can blame you for that. We haven't even (officially) written about the company's IPO here on The Motley Fool yet. (But that didn't stop Fool member hlygrail from getting a jump on the IPO with this superb introductory research report.)
In its IPO prospectus, Elastic describes itself thusly: "Elastic is a search company." But it's probably not the kind of search company you're thinking of. Elastic isn't Google. Rather, Elastic's forte is rummaging through large amounts of "structured and unstructured data from a multitude of sources such as databases, websites, applications, and mobile and connected devices" to find "relevant information and insights."
"When you hail a ride home from work with Uber, Elastic helps power the systems that locate nearby riders and drivers," explains the company in its prospectus. "When you shop online at Walgreens, Elastic helps power finding the right products to add to your cart. When you look for a partner on Tinder, Elastic helps power the algorithms that guide you to a match ... All of this is search."
Simply put, Elastic is a big data company.
Why Wall Street likes it
Eight big investment bankers combined forces to help bring Elastic to market earlier this month. Today, all eight of these bankers simultaneously initiated coverage of the stock. Curiously, however, these bankers split down the middle in their opinions of Elastic's investability, with four saying to buy Elastic stock, and four more saying to hold your horses.
Here's a quick survey of the positive notes, with a tip o' the hat to our friends at TheFly.com for the insight:
- The most conservative of Elastic's fans is investment banker Goldman Sachs, which initiated coverage of Elastic stock with a buy rating and $68 price target that sits only $2 above today's share price.
- RBC Capital is a bit more optimistic than that. Arguing that Elastic has "disruptive growth" potential in a $45 billion-a-year big data market, and predicting the stock (which is currently unprofitable) will ultimately turn profitable and "deliver high gross-margins with long-term profitability, RBC initiates coverage with an outperform rating and a $71 price target.
- Barclays goes RBC eight better with an overweight rating and a $79 price target.
- And last but not least, Merrill Lynch calls Elastic a buy, saying the company is "uniquely positioned to benefit from enterprises' needs to quickly connect disparate data with real time insights." Curiously, Merrill only sees the "enterprise search market" as worth "$9B-$10B" a year "by FY23," yet Merrill has the highest price target of all Elastic's underwriters: $81 a share.
The folks that aren't fans
That's the good news for investors who bought into Elastic's IPO. (And at this point they could probably use some good news, seeing as Elastic stock is trading $5 below its closing price from IPO day!) Now here's the bad news: Just as many of Elastic's underwriters don't think the stock is a buy. Here's the rundown:
- Once Elastic's second-biggest underwriter, distributing 75 million shares of the stock at its IPO, investment banker JPMorgan has since become the most pessimistic analyst following Elastic. Despite saying it has a "very favorable view" of Elastic and its search technology, JPMorgan warns that after its big IPO Day run-up, Elastic is now "the most expensive software name in [its] universe" -- and worth no more than $60 a share. (But the analyst still doesn't think you should sell it, rating itself only neutral" on the stock.)
- Canaccord Genuity is a bit less pessimistic than that. Valuing Elastic at $65 a share (with a hold rating), Canaccord blames a "more restrained market environment" (i.e., October's tech sell-off) for its belief the stock is more likely to fall than rise over the next 12 months.
- Similarly, Jefferies rates Elastic stock hold with a $65 price target, because the valuation today looks "stretched." Jefferies still insists the company's "unique" platform and "vast" potential market should enable strong growth rates over the next several years -- but perhaps not quite so strong as to justify a share price nearly twice what Elastic went public at.
- Finally, Citigroup gives us the strangest rating of the bunch. With a $74 price target that's even higher than what Elastic fans Goldman Sachs and RBC Capital awarded the stock, Citi nonetheless gives Elastic only a neutral rating. The reason: "[A]t 20x NTM EV/sales," Elastic's valuation is "in a league of its own" and trading far ahead of what peer big data stocks fetch.
The upshot for investors
And when you get right down to it, I think Citigroup's analysis of Elastic stock may be the most telling. On the one hand, there appears to be plenty of room for upside in this stock that, despite its run-up, still only sells for a total market capitalization of about $4.4 billion.
The problem facing investors is that at this early stage in the game, it's hard to know for sure whether Elastic (only six years young today) will be able to capitalize on all the opportunities that lie ahead of it.
Currently, Elastic boasts only $185 million in annual revenue (and sells for a market cap 23 times that). The stock isn't profitable, having lost more than $61 million over the last 12 months. Nor is Elastic expected to become profitable anytime soon. Estimates gathered by S&P Global Market Intelligence show Elastic continuing to lose money as far as the eye can see -- and indeed, losing more money in 2019, 2020, and 2021 than it's already lost this year. With numbers like these, it's easy to see why bankers would hesitate to rate Elastic stock a buy.