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Bull of the Day: Elastic (ESTC)

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Elastic (ESTC - Free Report) is a $5.5 billion big-data analytics provider that does the heavy lifting of searching for "dark data" that companies need to gather and process.
 
I borrowed the phrase "dark data" from Splunk (SPLK - Free Report) , another heavy duty data-engine you've probably heard of, because it describes the flood of log files and other digital data that companies must collect and harness. But first they must find, clean, and prep it before they can use it to model any business processes and gain insights from them.
 
Elastic's primary product/service is Elastic Stack, a set of software applications that ingest and store data from various sources and formats, as well as perform search, analysis and visualization functions. 
 
The company is growing sales at 50% this fiscal year (ends next April) to breach the $400 million mark. The average Street price target is now $107, with BofA/ML moving to $137, after a solid Q1 2020 (ended July). 
 
Elastic reported strong results with total revenue coming in at $89.7 million, exceeding consensus by $6.2 million, on 58% growth. Subscription revenue growth was 59.6% y-o-y vs. 59.4% last quarter. Net revenue retention was above 130% for the 11th consecutive quarter on broad-based customer expands.
 
KeyBanc raised estimates and reiterated their Overweight rating with a $110 PT citing "a compelling growth opportunity driven by an expanding number of use cases in security, log management, search, and monitoring."
 
Most covering i-banks raised their estimates on 8/29 after the report. Consensus revenue now stands at $410M for the year, for 51% growth. That's better growth than Atlassian (TEAM - Free Report) or Coupa (COUP - Free Report) (29-43%) at a Price-to-Sales valuation of 13X (closer to TEAM's 9X than COUP's 20X).
 
Now ESTC is a Zacks #1 Rank (Strong Buy) as estimates have risen again.
 
In September, we took a stake in ESTC near $85 for my TAZR Trader group and rode it up into the mid-$90s. But then the Software sector valuation correction resumed and we let it go.   
 
Now at $70, the stock offers unique value among young data-engine software companies like Splunk and Alteryx trading at just 10X next year's consensus estimate of $550 million.
 
Here are some other strong growth metrics from last quarter...
 
**Total subscription customer count over 8.8K (from 8.1K in Q4)
**Total customer count with ACV greater than $100K over 475 (from 440 Q4)
**SaaS revenue increased 71% y/y (77% excluding FX)
**Subscription revenue represented 92% of total revenue
**New wins and expansions included: TomTom, U.S. Navy, Freddie Mac, and NVIDIA (NVDA - Free Report) .
 
Elastic launches Elasticsearch service on Microsoft Azure
 
Elastic also announced the launch of Elasticsearch Service on Microsoft's (MSFT - Free Report) Azure for its managed service users who want more cloud provider options. Organizations that have standardized on Azure will now be able to enjoy the convenience of a fully managed Elasticsearch service on their preferred cloud platform.
 
This is an important partnership given that Elastic competes with Amazon AWS on these services.
 
Here's how Barclays addressed it in late June when shares were shares were finding support in the low $70s...
 
Analyst Raimo Lenschow believes the bear thesis for Elastic around competition from Amazon (AMZN - Free Report) Web Services Open Distro is overblown. The features released by AWS will likely help it convert a share of the millions of free users onto its platform, but Elastic focuses on large scale deployments, Lenschow told investors in a research note. This is where Elastic will continue to generate the vast majority of its sales growth, says the analyst. He believes the company's runway of growth with enterprises is unaffected by Open Distro and encourages long-term investors to buy into the recent share weakness caused by the lockup expiry. Lenschow reiterated an Overweight rating on Elastic with a $108 price target.
 
The King of Search Asks ESTC for Help
 
On Tuesday, the company behind Elasticsearch and the Elastic Stack announced the general availability of its Elasticsearch Service on Google Cloud Platform (GCP) Marketplace. From the press release...
 
Earlier this year, Elastic announced a deeper partnership with Alphabet (GOOGL - Free Report) to make the Elasticsearch Service on Elastic Cloud more accessible to Google Cloud Platform (GCP) users. Today, Elastic is realizing the first milestone in this initiative: the general availability of the Elasticsearch Service on GCP Marketplace following a successful beta with key customers. GCP customers can now subscribe to Elastic’s Elasticsearch Service through GCP Marketplace, simplifying procurement with consolidated billing through their GCP account. Also, GCP customer consumption of the Elasticsearch Service via the marketplace counts toward GCP committed use.
 
GCP users can now subscribe to the Elasticsearch Service through the GCP Marketplace and get access to the same exclusive features that only Elastic can offer, including Elastic SIEM, APM, Logs, Metrics, and more.
 
The Elastic Effect
 
Elastic is in the early stages of capitalizing on a large $45 billion TAM (total addressable market). The company has emerged as the leading modern search platform benefiting from a broad number of enterprise use cases across application search, log management, analytics, infrastructure monitoring, and security.
 
KeyBanc analysts say "The current growth trajectory, breadth of enterprise use cases, and growing popularity with 350M+ software downloads give us confidence the business model can scale to $1B+ revenue within five years as it gains share within a large $45B TAM."
 
Now here's a sample of other analyst notes after the company report August 28, courtesy of TheFly.com...
 
RBC Capital: Analyst Matthew Hedberg raised his price target on Elastic to $117 and kept his Outperform rating after its "strong" set of results in Q1, with upside in billings and revenue as well as little concern about competitive pressure from AWS. The analyst further notes that while the guidance for Q2 was also ahead of consensus, it still "feels conservative" given the company's recent execution and opportunity for expansion.
 
Barclays: Analyst Raimo Lenschow believes there was a "healthy level of skepticism" going into the report. However, Elastic confirmed its status as a "premium growth asset" in software with better than expected billings and revenue growth, contends Lenschow. He maintains an Overweight rating on the shares and ticked up his price target for the shares to $109 from $108.
 
Stifel Nicolaus: Analyst Brad Reback raised his price target for Elastic to $100 from $85 saying the company reported a "solid start" to fiscal 2020 with all key business metrics coming in ahead of guidance and consensus. Last night's results and "continued healthy market demand" led management to walk up fiscal 2020 revenue guidance by more than this quarter's beat, Reback tells investors in a research note. However, at current share levels, the analyst views Elastic as "appropriately-valued" and keeps a Hold rating on the stock.
 
Jefferies: Analyst John DiFucci says Elastic's "strong" fiscal Q1 results reflect accelerating new business trends, while its "best-in-class" recurring revenue growth rates "moderated some." The analyst sees a "groundswell of momentum" to use Elastic in the security market, but he keeps a Hold rating on the shares with a $90 price target. The shares trade at a significant premium to peers, DiFucci tells investors in a research note.
 
I couldn't find the most recent October 4 note from BofA/ML, but this one from June sums up their long-term thesis...
 
Elastic price target raised to $135 from $115 at BofA/Merrill: Analyst Kash Rangan reiterated a Buy rating on Elastic and raised his price target to $135 from $115, saying the company printed a "solid" quarter with revenues coming in ahead of the Street, with operating margin also beating estimates. In a research note to investors, the analyst notes that Elastic's fiscal 2020 revenue guidance of +47% y/y came in closer to his "high growth" scenario and says he sees many growth vectors ahead for the stock, saying he thinks Elastic is uniquely positioned to become one of the few small software franchises that can scale to $1B in revenues over the next 4-5 years.
 
Bottom line: Buying ESTC near $70 should offer good upside over the next few quarters. That's why I'm long.
 
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