We came across a bullish thesis on Elastic NV (NYSE:ESTC) on ValueInvestorsClub by cuyler1903. In this article, we will summarize the bulls’ thesis on ESTC. The company’s shares were trading at $104.96 when this thesis was published, vs. the closing price of $101.40 on Jan 03.
CHAIWATPHOTOS/Shutterstock.com
ESTC is a search artificial intelligence (AI) company that delivers hosted and managed solutions designed to run in hybrid, public or private clouds, and multi-cloud environments in the United States and internationally. Its primary products include ElasticSearch, Elastic Observability and Elastic Security. ElasticSearch is a search engine powered by AI that provides customized experience for websites and applications. Observability manages application performance data along with logs and other metrics. Security takes care of threat detection and event management. ESTC has around 21,000 customers across the globe.
One of its biggest strengths is the involvement of the promoter Shay Shanon, who is also the CTO of the company. Shay was instrumental in developing the ElasticSearch platform and owns stock worth almost $1 billion. His engagement with employees and clients illustrates how passionate he is about the company. The fact that ESTC won the 2024 Microsoft US Partner of the Year Award is proof that the product is competitive and widely accepted.
ESTC enjoys an adjusted EBIT margin of 12% even though it has a high operating expense. With $1 billion in cash, the business is expected to invest heavily in R&D and sales/marketing initiatives. A sticky customer base provides a stable source of revenue with the potential to increase market share.
ESTC has an EV/Gross Profit valuation of 7.9x based on 2025 consensus. Its comparable Datadog trades at 14x, implying that ESTC is almost at a 45% discount. While the expected growth rate is 16%, it can definitely match that of its client AWS which has been accelerating at ~18%. With an estimated gross profit of $1.4 billion in 2025, the intrinsic value of the company comes out to be $200, almost 100% higher than the current level. There may be a higher valuation attached if a strategic buyer shows interest in ESTC.
While we acknowledge the potential of ESTC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ESTC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.
Hedge Fund Resource Center