Please ensure Javascript is enabled for purposes of website accessibility

Here's My Top Stock to Buy in December

By Keith Speights – Dec 1, 2019 at 9:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This small tech stock should benefit from an unstoppable trend: explosive growth in data.

December ranks as the most important month for many investors. Why? In part because of a concept called "tax loss harvesting." Many investors sell stocks in December that have lost money during the year to claim a capital loss when they file their tax returns. I don't think it's wise to wait until the end of the year to do this, by the way, but it's nonetheless a common practice.

Even for investors who don't harvest their losses for tax purposes, the end of the year is often a time where they take a hard look at their portfolios and try to determine which low-performing stocks should be replaced with stocks with greater growth potential.

If you're in either of these categories, you're probably looking for great stocks to buy. My top stock to buy in December is one that you might not have heard of but holds the potential to be a huge winner: Elastic (ESTC 3.23%).

Woman holding phone with search box displayed over it

Image source: Getty Images.

What Elastic does

Ask people at Elastic what the company does and they'll probably tell you, "Elastic is a search company." But there's a whole lot more to the story.

Elastic developed an open-source platform called the Elastic Stack that enables customers to store, search, analyze, manage, and visualize data. Its software can run anywhere -- in corporate on-premises data centers, in the cloud (whether public or private), or in hybrid environments.   

The Elastic Stack was designed from the ground up to be a distributed system. That means it can run across multiple servers. And as each additional server is added, its search and other capabilities become faster, delivering blazingly fast results.

While Elastic started with core search functionality, it has expanded its platform to support security information and event management. The company has also made some important acquisitions, including buying endpoint security provider Endgame for $234 million this year.   

Why I really like this stock

What first caught my eye with Elastic was its tremendous growth. The company posted 58% year-over-year revenue growth in its latest quarter. It now has over 8,800 customers, with 475 of them generated annual revenue topping $100,000. These customers include many whose products millions of people use on a regular basis, such as Adobe and Uber.

Elastic uses a "freemium" model that's similar to that of another of my favorite tech stocks, MongoDB. Customers often start out using a free version of the Elastic Stack. Many of them become paying customers, as they want access to premium features and support. Ninety-two percent of Elastic's total revenue comes from subscriptions.

The company has a total addressable market in the ballpark of $45 billion, including search, content analytics, IT operations management, big data analytics, and security analytics. It currently has a market share well below 1%, so there's a lot of room to grow.

And there's going to be a lot more data to search in the near future. Market researcher IDC projects that the total data stored worldwide will multiply more than five times by 2025 to 175 zettabytes (or 175 billion terabytes). IDC expects the expansion of data will be "never-ending."

What I don't like

There's one big thing that I don't like about Elastic: It's not profitable. The company lost $41.8 million in its last quarter, a much wider loss than it did in the prior-year period.

With these mounting losses, some investors might also find it hard to accept Elastic's valuation. The company's market cap tops $6 billion. 

Keep in mind, though, that Elastic is still in an aggressive growth mode. It's making strategic acquisitions and spending a lot more on sales and marketing than it did during its early days. I think that it's just a matter of time before the company achieves profitability. And when it does, watch out. Companies that use software-as-a-service (SaaS) models like Elastic tend to deliver sizzling earnings growth after they become profitable. 

A wild card

Don't be surprised if Elastic finds itself a buyout target. Elastic would be an attractive addition to a large cloud platform provider looking to become an instant leader in the fast-growing enterprise search arena. 

Bigger players have already gobbles up several of Elastic's key rivals. For example, Oracle acquired Endeca. HP bought Autonomy before it merged with Micro Focus. Microsoft acquired FAST.

I wouldn't buy Elastic just because of the wild card that it might be acquired. But it's certainly a possibility. You don't have to bet on a buyout to justify investing in Elastic, though. The company's huge potential market, industry-leading products, and tremendous growth provide enough reasons by themselves.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Keith Speights owns shares of MongoDB. The Motley Fool owns shares of and recommends Elastic N V, Microsoft, and MongoDB. The Motley Fool recommends Adobe Systems and Uber Technologies and recommends the following options: long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.