What happened
Cloud software specialist Elastic (ESTC 2.21%) jumped on Friday, gaining 10% by 3 p.m. ET, compared to a 1.5% increase in the S&P 500. That boost added to a bright 2023 so far for shareholders. The stock is up 25% this year, compared to a 5.3% increase in the wider market.
Friday's rally was powered by Elastic's Q3 earnings report, which featured a bullish short-term growth outlook.
So what
Sales were up 27% in the period that ended in late January, after accounting for currency exchange rate shifts. The company saw especially strong demand for its cloud services platform, which was up 40% on that basis. Some investors were worried heading into the report that many of Elastic's potential clients would decide to scale back on spending on its search services.
Instead, deals were relatively easy to find. "Customers made strong contractual commitments to us during the quarter, and we remain confident in the long-term market opportunity," CEO Ash Kulkarni said in a press release.
On the other hand, Elastic isn't yet generating sustainable earnings. Operating losses expanded to $69 million from $46 million a year ago, in fact. But the company produced positive cash flow, which is encouraging for a software company in this stage of its growth cycle.
Now what
Some of the best news in the earnings update was that Elastic is seeing no collapse in demand so far in 2023. Revenue is expected to grow by nearly 20% in the Q4 period and by 28% for the full year. Hitting those figures would easily push Elastic past $1 billion in annual sales in fiscal 2023.
Shareholders are hoping that there are many more years of growth ahead for the business. A key part of the investing thesis is that Elastic will take steps toward profitability too.
The company will have to continue creating in-demand search and cybersecurity services to continue that momentum. And competition should remain intense in this niche. But Elastic is finding ways to grow despite slowing economic growth rates around the world.
