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Is Elastic Stock a Buy?

By Anders Bylund – Updated Oct 19, 2020 at 12:22PM

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The enterprise search specialist is building up an impressive head of steam in the market. Does the business support these skyrocketing share prices?

Enterprise search and data visualization expert Elastic (ESTC -0.20%) is soaring these days. The stock has gained 87% year to date and set fresh all-time highs nearly every week over the last three months. Is it too late to jump aboard the Elastic bandwagon at these lofty share prices? Let's take a look.

Elastic by the numbers

At first glance, Elastic's stock looks incredibly overvalued. Shares are trading at 22 times the company's trailing sales and 23 times Elastic's book value, and I can't even talk about price-to-earnings or cash flows because the company is reporting negative profits of every kind.

At the same time, Elastic's business is growing like crazy. Revenue rose 43% year over year in August's first-quarter report, and that was a slow quarter by this company's standards. Earnings are consistently negative, but they're moving closer to the break-even point, quarter by quarter. The top-line growth trend is more important than reaching positive earnings or cash flows anytime soon, however, and Elastic is investing heavily into additional growth-boosting projects. R&D expenses have more than tripled in two years, sowing the seeds for further growth:

ESTC Revenue (TTM) Chart

ESTC Revenue (TTM) data by YCharts. TTM = trailing 12 months.

This is a standard operating procedure for a high-octane growth stock. Elastic ticks all the boxes for this exciting but risky investing strategy.

An impressive customer list

The company has managed to squeeze plenty of massive household-name customers into a modest revenue stream. Some of their search-tool applications are fairly obvious while others are more creative.

For example, retail giant Walmart (WMT -0.39%) uses Elasticsearch to uncover gift-card scams and other fraudulent activities in real time. Ticketmaster parent Live Nation Entertainment (LYV 1.13%) built its ticket-search functions around Elastic's search tools. Pharma titan Pfizer (PFE -0.57%) relies on Elastic's search systems to organize and analyze its enormous volume of research data. That's just a small sample of Elastic's big-name clients using its flexible data-search solutions to gain an edge on the competition.

Elastic can point to this growing portfolio of successful search systems in its marketing messages, accelerating the hunt for new customers as the list of important wins grows longer.

A green charting arrow bounces skyward off a black trampoline.

Image source: Getty Images.

Where will Elastic go from here?

This is still a relatively small business. Trailing revenue stands at $467 million today, up from $305 million a year ago. Elastic is expanding its top-line sales as rapidly as possible while taking care to run a sustainable business model.

"We continue to balance doing the right things for the near term while planning for the long term," CEO Shay Banon said in the first-quarter earnings call. "Looking ahead, we remain focused on investing in our solutions for enterprise search, observability, and security. We believe our single, unified technology stack gives us an advantage."

That sounds like a solid growth plan to me, powered by the generous investment in R&D mentioned above. The company needs to execute on these promises and continue to build momentum in the enterprise software market, and many things can go wrong along the way.

That being said, Elastic offers a unique product in an explosive growth market, and the stock is actually not terribly expensive compared with many other growth-oriented companies. All things considered, Elastic is a solid buy if you're willing to take on some market risk in return for explosive revenue growth.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Elastic and Live Nation Entertainment. The Motley Fool has a disclosure policy.

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