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Elastic Stock Looks Like a Value as Digital Transformation Demand Remains Strong

By Nicholas Rossolillo – Jun 13, 2020 at 8:45AM

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The search and analytics firm wrapped up a fantastic year, although growth is moderating.

After a nearly year-long tumble culminating with the market meltdown in March 2020, shares of data analytics firm Elastic (ESTC -0.01%) are homing back in on all-time highs. Digital transformation got forced into high gear this year with the onset of the pandemic, as organizations slow to adapt to modern digital operating models scramble to keep the doors open. Shelter-in-place may not continue as it has the last few months, but it's becoming increasingly clear that remote work and digital systems supported by the cloud are fast becoming the norm.  

The trend was already a good one for big data and analytics companies, but the thesis strengthened amid the coronavirus crisis. Elastic has now rallied nearly 30% this year -- including a 90% run since the lows in mid-March -- but this cloud stock is a relative value compared to its peers as it continues to post impressive growth.

A person in the background pressing an illustrated search bar in the foreground.

Image source: Getty Images.

The transition to SaaS continues

Elastic builds self-service big data tools that allow users to search for and organize information, monitor digital operations, and detect cyber threats. Some of Elastic's competitors include legacy industry leader Splunk (SPLK -3.34%) as well as fellow upstart Datadog (DDOG 1.52%)

The last couple of years have been a great run for big data and analytics firms. Not only is digital transformation picking up steam, so is a transition to cloud-based software offered on a software-as-a-service (SaaS) model (think renewable licensing deals). It's meant big increases in business for small Datadog and Elastic -- although our company of focus here has also been undergoing a bit of a transformation from legacy service billing methods to en vogue SaaS. It's meant rapid growth, with SaaS business in fourth-quarter fiscal 2020 (the three months ended April 30, 2020) accelerating to a 110% year-over-year rate and capping an excellent year for the software firm.  

Metric

12 Months Ended April 30, 2020

12 Months Ended April 30, 2019

Change

SaaS revenue

$45.8 million

$92.3 million

101%

Total revenue

$428 million

$272 million

57%

Gross profit margin

71.3%

71.3%

0%

Free cash flow

($35.6 million)

($27.4 million)

N/A

Data source: Elastic.  

It's also worth noting that the stellar conclusion to fiscal 2020 occurred during the start of the economic meltdown hastened by the pandemic. Clearly, all things related to helping an organization bridge the gap to digital-first are getting a boost, Elastic included. 

But what of the guidance? After all, for a high-growth software outfit like Elastic, it's all about the future -- especially considering cash is getting aggressively reinvested to promote expansion, pushing resulting free cash flow (revenue less cash operating and capital expenses) into negative territory. For Q1 fiscal 2021, management forecast revenue to be up 34% from a year ago, and full-year 2021 revenue to be up 25%. New business is tapping the brakes, as a slow recovery for the global economy lies ahead and many potential customers are being cautious with new spending projects.  

Far cheaper than the average analytics firm

Of course, growth is growth, and anything north of 20% given the current economic environment is hard to get too upset about. If the slowdown persists into next year and Elastic's losses continue to mount, it's worth reevaluating, but in the meantime the cloud software company is in good shape. 

Cash and equivalents on the balance sheet at the end of April were $297 million, and there was no debt. That gives Elastic plenty of room to continue investing during this downturn. The company also trades for 12.5 times expected fiscal 2021 revenue. That compares with 12.3 forward sales for Splunk, which is temporarily stuck in neutral as it makes its cloud transition, and a whopping 41.9 for Datadog, which expects full-fiscal year revenue growth of 54%, not to mention that it just raised $634 million in fresh cash via a recent convertible debt offering. Thus, a premium of some amount is warranted for Datadog, but Elastic seems to have been left in the dog house while Datadog has been brought in by a warm and cozy fire.

I therefore think Elastic looks like a value -- albeit a relative one compared to its peers. Its valuation most certainly implies it will continue to expand, but the outlook for the year ahead as the global economy begins to patch itself back together leaves plenty to be happy about.

Nicholas Rossolillo and his clients own shares of Splunk. The Motley Fool owns shares of and recommends Datadog, Elastic N V, and Splunk. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Elastic N.V. Stock Quote
Elastic N.V.
ESTC
$71.74 (-0.01%) $0.01
Splunk Inc. Stock Quote
Splunk Inc.
SPLK
$75.20 (-3.34%) $-2.60
Datadog, Inc. Stock Quote
Datadog, Inc.
DDOG
$88.78 (1.52%) $1.33

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