1. If Elastic is such a great company, has 30% ARR, has great products, great customer focus... how come it is growing at merely 42% YOY. Whereas companies like DDOG is growing at 74%
2. It is funny that you mentioned conservative/pessimism of CFO.. If that was the issue, every earnings would have been blowout of conservative forecast.
Hi.. Based on future cash flows, where do you see it today ? Comparing it to other software stacks appears contrary to what you were recommending in your piece on valuation.
Thanks for the comment. Are you referencing our section on "Valuation Must Always be Understood in Proper Context'? In that post, we are not saying that you should never use peer comps but that if these companies are in different end markets, you need to be careful with how much your decision is influenced by peer multiples as you may be comparing two things that are not directly comparable. Our section on Elastic's peer multiples is rather short and not the focus of our writeup. It's good to be aware of how they are valued, especially in context with other qualitative diligence.
In our valuation article, we end that section by saying, "Investors must flex the appropriate quantitative and qualitative muscles and avoid solely evaluating simple trading metrics vs. peers. Failure to evaluate deeper considerations, such as developing thoughts around the long term cash impacts of a business/market, often leads to short-sighted decisions that negatively impact long term returns."
In terms of ESTC's cash flow generation. We believe they are on the right track. On June 2nd, they reported earnings and are now generating positive cash flow (Operating cash flow was $22.5 million with free cash flow of $18.3 million, or 3% free cash flow margin). While this is still a very small FCF margin, Shay and team are still investing aggressively in improving the product and expanding the TAM, which hurts the FCF profile short term but makes the company stronger in the long run. We believe this is the right call today as the company has a lot of room for growth and reinvesting in the business is the best use of capital, especially coming off the AWS fork. Hopefully that helps!
I have two questions.
1. If Elastic is such a great company, has 30% ARR, has great products, great customer focus... how come it is growing at merely 42% YOY. Whereas companies like DDOG is growing at 74%
2. It is funny that you mentioned conservative/pessimism of CFO.. If that was the issue, every earnings would have been blowout of conservative forecast.
Loved the article.. very well written!!
Hi.. Based on future cash flows, where do you see it today ? Comparing it to other software stacks appears contrary to what you were recommending in your piece on valuation.
Thanks for the comment. Are you referencing our section on "Valuation Must Always be Understood in Proper Context'? In that post, we are not saying that you should never use peer comps but that if these companies are in different end markets, you need to be careful with how much your decision is influenced by peer multiples as you may be comparing two things that are not directly comparable. Our section on Elastic's peer multiples is rather short and not the focus of our writeup. It's good to be aware of how they are valued, especially in context with other qualitative diligence.
In our valuation article, we end that section by saying, "Investors must flex the appropriate quantitative and qualitative muscles and avoid solely evaluating simple trading metrics vs. peers. Failure to evaluate deeper considerations, such as developing thoughts around the long term cash impacts of a business/market, often leads to short-sighted decisions that negatively impact long term returns."
In terms of ESTC's cash flow generation. We believe they are on the right track. On June 2nd, they reported earnings and are now generating positive cash flow (Operating cash flow was $22.5 million with free cash flow of $18.3 million, or 3% free cash flow margin). While this is still a very small FCF margin, Shay and team are still investing aggressively in improving the product and expanding the TAM, which hurts the FCF profile short term but makes the company stronger in the long run. We believe this is the right call today as the company has a lot of room for growth and reinvesting in the business is the best use of capital, especially coming off the AWS fork. Hopefully that helps!
Thank you for your feedback. Greatly appreciated.
Brilliant analysis of Elastic!!