Why Elastic NV (ESTC) Stock is a Compelling Investment Case

Greenhaven Road Capital recently released its Q2 2020 Investor Letter, a copy of which you can download here. Greenhaven’s estimated returns for the second quarter exceeded +50%, more than markets have returned over many five-year periods. Both funds are up single digits for the year, comparing favorably to the Russell 2000, which ended June down -13% year to date. You should check out Greenhaven Road Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, Greenhaven Road Capital highlighted a few stocks and Elastic N.V. (NYSE:ESTC) is one of them. Elastic N.V. (NYSE:ESTC) is an open-source software company. Year-to-date, Elastic N.V. (NYSE:ESTC) stock gained 40.7% and on July 27th it had a closing price of $90.44. Here is what Greenhaven Road Capital said:

“Elastic (ESTC) – I wrote about Elastic software in detail in the Q4 2019 letter, and the holding has since appreciated its way into the top five position. As a refresher, Elastic is an open source software company that enables users to search through structured and unstructured data for a range of consumer and enterprise applications. Quantitatively, it is the most expensive company that we own at more than 14X revenue, but it is also the most impressive on a variety of metrics, including net revenue retention above 130%. Further, in a quarter that included two of the most economically challenging months of the last 50 years (March and April), Elastic grew sales an astounding 57% year-over-year. In eight years and with minimal capital, the company has grown from an open source project to over $500M in sales.

When I graduated from business school, I worked for John Doerr’s New Schools Venture Fund. John’s day job was a venture capitalist at Kleiner Perkins, where he used a “mercenary or missionary” framework for evaluating CEOs. He spoke about the differences in this video (Link). To be clear, both types can be successful, but he had a strong preference for missionary CEOs. I realize that some may roll their eyes at the potential fluffiness of the concept, so it may have more gravitas when you consider that the person he held out as the prototypical missionary CEO in the early 2000s was none other than Jeff Bezos, who is now the richest person in the world (even after his divorce).

At New Schools, my job was to source and diligence potential investments in the education sector. I believe that Shay Banon, Elastic’s CEO, is a missionary CEO trying to advance the open source software movement and the power of search. There have been dozens of difficult decisions to further these ends, many of which have negative short-term economic impacts but have resulted in a very large and supportive user base. Shay has repeatedly delayed short-term gratification, making key features available to the free users. He is also investing very heavily in R&D, devoting more than 35% of revenue to development alone. These investments have allowed the company to expand into security, monitoring, and now enterprise search.

The company has a substantial asset that does not appear on the balance sheet: a large base of non-paying users. Since Elastic is an open source software company that offers free versions of the software, there are very likely more than 50X non-paying customers for each paying customer. Now, many of the non-paying customers will never convert, but over time, Elastic is adding features to the paid versions that should nudge non-paying over to paying, especially given the loyalty that the company has inspired. A missionary CEO, a mission-critical product, a history of under-monetizing and significantly investing in future products is a very attractive set-up for investment.”

In Q1 2020, the number of bullish hedge fund positions on Elastic N.V. (NYSE:ESTC)  stock decreased by about 15% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with Elastic’s growth potential. Our calculations showed that Elastic N.V. (NYSE:ESTC)  isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.