What happened
Shares of Elastic (ESTC 2.26%) slumped 12.5% in October, according to data from S&P Global Market Intelligence. The enterprise search and analytics company's stock lost ground after Workday warned of slowing growth for its core product suite and analysts at Morgan Stanley published a report that lowered pricing targets on multiple cloud-services companies.
Elastic wasn't included in the list of companies that received price cuts from Morgan Stanley, but the investment firm's software-sector team warned about rich valuations across the cloud-software space. Combined with Workday's statements about its own slowing growth, the warnings and price cuts from analysts resulted in a significant pullback for Elastic and other players in the industry.
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So what
Workday held its analyst day conference on Oct. 15, and it told attendees that growth for its human capital management (HCM) software was expected to slow substantially. The company expects that its HCM software sales will wind up growing 20% in the current fiscal year, and the underwhelming target appears to have affected investors' appetite for the cloud software space.
Morgan Stanley's team of analysts for the software sector lowered price targets for companies including Workiva, PagerDuty, Yext, VMware, ServiceNow, Slack, and MongoDB on Oct. 16. The firm's analysts cited a recent survey from CIO suggesting a slowdown for enterprise software spending and high valuations as reasons for investors to be cautious about the cloud software space. With the market taking a more cautious position on cloud software companies, Elastic NV stock got caught in the sell-off.
Now what
Elastic has a market capitalization of roughly $5.75 billion and trades at 14 times this year's expected sales after the pullback. The company has a strong position in the enterprise search market and could turn into a big winner for long-term shareholders, but investors should proceed with the understanding that its growth-dependent valuation sets the stock up for declines if the outlook in the broader cloud-software space continues to worsen.
