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The following segment was excerpted from this fund letter.
Elastic Software (NYSE:ESTC)
Elastic has not disclosed churn, but at their recent investor day, they disclosed that the software (which powers search for a wide range of customers, including UBER, and also provides observability and security solutions) has been downloaded over 3 billion times.
While we cannot extrapolate cleanly to the number of active users because one user can do multiple downloads as versions are updated, the active users should dwarf the company’s 19,000 paying customers. One thing is clear – once a customer is “landed,” they tend to spend more in the subsequent years. Elastic’s net revenue retention has hovered around 130% for several years.
Elastic benefits from the secular tailwinds of ever-growing amounts of unstructured data and employs a usage-based pricing model: the more data used, the more they can charge. The fastest growing portion of their business is related to security products, and there does not appear to be a slowdown in cyber threats coming any time soon.
There are also two tailwinds on the product front. The first is that they have succeeded in stopping AWS (Amazon Web Services) from selling a confusingly named competitive product (Elasticsearch). Secondly, the gap between the quality of their free offerings and paid offerings has only widened, nudging users towards paid.
The company has added 2,000 basis points of operating profits in the last four years and has indicated that this progression should continue. They are currently break-even and cash flow positive with a rock-solid balance sheet. ESTC shares are trading at less than 5X 2023 revenue with a long runway for 30% growth and ever-improving margins and profitability.
A recession will not be good for Elastic, but their products are mission critical and the company will benefit from both secular and product tailwinds.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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