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1 Under-the-Radar Growth Stock to Buy Now

By Trevor Jennewine – Aug 27, 2021 at 7:10AM

Key Points

  • Elastic brings search functionality to a range of business use cases.
  • Elastic's software platform addresses a $78 billion market.
  • The company has grown revenue at 54% per year over the last three years.

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Investors may not be familiar with Elastic, but the company is growing quickly.

Many investors have probably never heard of Elastic (ESTC -1.99%), or they've never taken the time to dive into its business. However, this under-the-radar stock is up 60% in the last year and up 136% since its IPO in 2018, outperforming the broader market in both cases.

More importantly, Elastic is executing on an effective growth strategy, which is reflected in its strong financial performance. That's why I think this stock will continue to beat the market in the years ahead. Here's what you should know.

Man looking at his laptop.

Image source: Getty Images.

Market opportunity

Elastic is a search company. At the core of its tech stack is Elasticsearch, a platform that functions as a datastore, as well as a real-time search and analytics engine. This tool allows clients to log and index data of all types, then query, analyze, and draw insights from that information.

To simplify the most common use cases, Elastic has built applications on top of its tech stack. For instance, Enterprise Search allows clients to sift through documents, systems, and tools to find a particular resource. It also allows clients to infuse websites and applications with search functionality. In fact, Elastic powers Uber's ride-hailing app, helping the company pair drivers with riders in close proximity. And Elastic powers the search engine behind Shopify's help documentation, enabling merchants to quickly find the appropriate information.

Elastic also provides pre-built tools for observability and security. Its platform logs relevant data points, then leans on artificial intelligence to categorize information and detect anomalies in applications, networks, and infrastructure. In turn, that allows IT and security teams to identify, investigate, and resolve problems. Collectively, these solutions bring Elastic's addressable market to $78 billion, according to management.

Growth strategy

Elastic employs a freemium pricing strategy, allowing developers, IT professionals, and security analysts to test products on a limited basis. So far, this tactic has proven to be a powerful growth driver. According to DB Engines, Elastic is the most popular enterprise search engine on the market, outranking second-place Splunk by a wide margin.

As a result, Elastic has grown its customer base quickly in recent years. But the company has also managed to hang onto existing customers. In fact, Elastic posted an expansion rate of "slightly below 130%" during the most recent quarter, suggesting that customers are spending more over time.

Metric

Q1 2019

Q1 2022

CAGR

Customers

5,500

16,000

43%

Source: Elastic SEC Filings. CAGR = compound annual growth rate. Note: Q1 2022 ended July 31, 2021.

Currently, Elastic generates subscription revenue in two different ways: on-site software deployments and software-as-a-service (SaaS). Management sees the SaaS product (Elastic Cloud) as a big opportunity for future growth, as clients avoid the cost and complexity of managing the underlying infrastructure.

To that end, Elastic Cloud contributed 27% of revenue in fiscal 2021, up from 22% in 2020 and 17% in 2019. This growth is encouraging, but the company still has plenty of runway ahead.

Financial performance

Digital transformation has made data more plentiful than ever, creating problems and opportunities for enterprises. Specifically, troves of data are only helpful if you have the tools to unlock value in that information. Of course, Elastic fits this bill, and the company has posted impressive top-line results over the last three years.

Metric

Q1 2019 (TTM)

Q1 2022 (TTM)

CAGR

Revenue

$184.9 

$672.7 million

54%

Source: Elastic SEC Filings, Ycharts. TTM = trailing-12-months. CAGR = compound annual growth rate. Note: Q1 2022 ended July 31, 2021.

Here's the bottom line: Elastic helps clients leverage search to boost efficiency, infrastructure performance, and security, all of which are critical to virtually any business. Moreover, Elastic has a best-in-class product and a large market opportunity, two attributes that should drive growth in the years ahead. That's why this under-the-radar growth stock looks like a smart long-term investment.

Trevor Jennewine owns shares of Shopify. The Motley Fool owns shares of and recommends Elastic, Shopify, and Splunk. The Motley Fool recommends Uber Technologies and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

Stocks Mentioned

Elastic Stock Quote
Elastic
ESTC
$56.03 (-1.99%) $-1.14
Splunk Stock Quote
Splunk
SPLK
$88.64 (-3.12%) $-2.85
Uber Technologies Stock Quote
Uber Technologies
UBER
$28.75 (1.45%) $0.41
Shopify Stock Quote
Shopify
SHOP
$43.06 (-0.78%) $0.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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