Elastic: Moving To Neutral On Valuation

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About: Elastic (ESTC)
by: KMP Ideas

Summary

During the IPO, Elastic raised gross proceeds of $252 million.

The company's shares currently priced at 155% more than the midpoint of the initial range.

Despite the relative undervaluation to the group of other fast-growing SaaS companies by the PSG ratio, the current price of $70 looks pretty risky and leaves no margin of safety.

One of the most successful tech IPOs of the year took place last Friday. Enterprise search company Elastic (ESTC) raised gross proceeds of $252 million, and the company's shares are currently priced at 155% more than the midpoint of the initial range.

Such a rapid growth of shares was due to huge revenue growth and an extremely successful business model. All products of the company are provided for free with open source code, but to expand functionality, the customer can purchase a paid subscription. The company is extremely efficient in generating revenue from its customers due to the expansion of an already existing subscription and the net expansion rate over the past few quarters is above 130%. Elastic is also the leader in customer acquisition costs: according to data from the Alex Clayton article, the payback period of the company for attracted customers is 15 months, which is much lower than the payback period of competitors. Revenue growth for FY18 amounted to 81% Y/Y and 77% for the first quarter of FY19.

With the current share price of $70, Elastic's market capitalization is $4.85 billion, which is about 26 times the revenue for the last 12 months. If we compare the company's P/S multiple and the growth rate of its revenue, then Elastic remains relatively undervalued to the group of fast-growing SaaS companies. At the same time, this undervaluation is not significant, and the purchase of Elastic shares at the current price looks quite risky.

The Offering

Initially, the company set the price range for its IPO at $26 to $29. A few days later, the range was raised to $33 to $35, and the final offering was priced at $36 per share.

On the first trading day, the shares open with a 100% "pop" and closed at $70.

During the offering, Elastic sold 7 million shares and raised gross proceeds of $252 million. Net proceeds after the discount granted to underwriters amounted to $229.5 million. Underwriters also have the option to purchase an additional 1.05 million shares.

The company's cash position after IPO amounted to $280 million.

Free float of shares after IPO will be about 10%, another 47% of shares are concentrated among large institutional investors including Benchmark Capital and New Enterprise Associates, and 13.7% from the founder and CEO of the company - Shay Banon. Neither institutional investors nor the CEO of the company sold their shares during the IPO.

Source: S-1/A

Valuation

With a current share price of $70, the company's market capitalization is $4.85 million. Enterprise value with the cash that it expects to raise from this IPO is $4.7 million.

Over the past 12 months, the company's revenues amounted to $185 million, revenue growth from FY17 to FY18 was 81%, so the current P/S and P/S-to-Growth multiples are 26.3 and 0.32, respectively.

Below are the values of PSG multiples for other fast-growing SaaS companies, which I compared with in my previous article about Elastic. After an incredible growth on the first trading day, according to the PSG multiple, the company is still slightly undervalued to its peer group.

Source: YCharts, calculations by the author

At the same time, Elastic outperforms most of the companies by the gross margin and also already generates free cash flow, which is also not typical for this group.

Therefore, I think that in the long term, shares of Elastic have a small upside potential.

Final Thoughts

Business efficiency, along with huge revenue growth, attracted interest from investors during an IPO.

Despite the relative undervaluation to the group of other fast-growing SaaS companies by the PSG ratio, the current price of $70 looks pretty risky and leaves no margin of safety. On the first trading day, shares went down to $66, so it is very likely that we will see small dips in the near future, on which it will be possible to buy shares of Elastic at a more attractive price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.