Elastic's Quiet Period Ends: What The Street Thinks

Shares of Netherlands-based Elastic NV ESTC, the company behind Elasticsearch and the Elastic Stack, rose nearly 100 percent on its trading debut in early October. The Street is offering first takes on the stock now that the quiet period has come to an end.

The Analysts

• Jefferies' John DiFucci initiated coverage of Elastic with a Hold rating and $65 price target.
• Canaccord Genuity's Richard Davis initiated with a Hold and $65 price target.
• Citi's Tyler Radke and Walter Pritchard initiated with a Hold and $74 price target.

Jefferies: Stretched Valuation

Elastic boasts a simple-to-understand business model: the ability to "ingest and store data from any source, and in any format, and perform search, analysis and visualization in milliseconds or less," DiFucci said in the initiation note.

The total addressable market for Elastic's expertise stands at around $40 billion today and could nearly double to $71 billion by 2022, the analyst said. Yet the real opportunity for Elastic could be much larger, as its technology is limited only by the "creativity of its customers," he said. 

Despite what sounds like a bullish outlook, the stock's valuation needs to be taken into consideration, DiFucci said. Shares of Elastic were priced at $36 after its initial filing pricing was boosted from a range of $26 to $29 to $33 to $35. After one day of trading, shares soared nearly 100 percent to the $70 level, but have since retracted to the low-$60s.

Even at current levels, shares are trading at 20.4 times 2019 recurring revenue, which is a "significant" premium to the comparable group, according to Jefferies. 

Related Link: Elastic's IPO: What You Need To Know

Canaccord: 'Overshot' IPO Debut

Elastic's business directly addresses a big problem companies face, Davis said in an initiation note.

At a time when the complexity and volume of enterprise data explodes, companies and developers need technology that allows them to instantly analyze their information to make better decisions and create a superior user experience, the analyst said. Elastic's expertise in search and data analytics is evident given a $225-million revenue run-rate that is growing at nearly 80 percent, with expectations to generate at least $1 billion in revenue by 2022, he said. 

Similar to other high-growth software IPOs, the stock "overshot" on day one, Davis said. Even assuming a 40-percent compounded annual revenue growth rate through 2024 of $1.8 billion and a mid-teens free cash flow margin, the stock is still lofty at 17.3 times and 13.2 times 2019 and 2020 estimates, according to Canaccord. 

Citi: League Of Its Own

Similar to Jefferies and Canaccord, Radke and Pritchard said in a research report that Elastic's valuation concerns prevent a bullish stance. The Citi analysts said the stock is in a "league of its own" at 20 times NTM EV/sales, which is a level that is difficult to grow from.

Price Action

Elastic shares were trading higher by more than 6 percent at $65.55 at the time of publication Tuesday.

Related Link: IPO Outlook For The Week: Banks And Biotechs

Photo courtesy of Elastic.