Last week turned sour for the markets, as interest rates continued to rise. But this didn’t matter much for Elastic (NYSE:ESTC). The company, which is an open-source software provider for search and visualizations, launched its IPO. And it was a doozy.
On the first day of trading, the Elastic IPO soared 94% to $70. Keep in mind that before the offering the company boosted the price range from $26-$29 to $33-$35, which indicated robust demand.
The Elastic IPO was listed on the NYSE and the lead underwriters included Goldman Sachs (NYSE:GS), JP Morgan (NYSE:JPM), Barclays (NYSE:BCS), RBC Capital (NYSE:RBC), BofA Merrill Lynch (NYSE:BAC), Citi (NYSE:C) and Jefferies. And yes, the public offering had the second highest first-day performance this year. The highest was Zscaler (NASDAQ:ZS), which posted a sizzling return of 131%.
Even among tech circles, Elastic is not necessarily well known. But the company was founded in Netherlands. Being based outside of the Silicon Valley echo chamber — though there is an Elastic office in the area — it can get tough to gin up a lot of buzz. Going forward, however, the successful Elastic IPO is likely to greatly increase the company’s visibility.
What Is Elastic?
First of all, Elastic’s core technology is based on open-source technology. Open-source technology is downloaded for free and any coder can improve it. This comes with the benefit of a global team of engineers evolve the technology. As for the Elastic software, it’s been downloaded more than 350 million times since 2013 and has a community of over 100,000 Meetup members.
Elastic’s technology allows enterprises to search structured and unstructured data, such as from databases, websites, mobile apps, log files and so on. There are also powerful features to derive insights and patterns.
For example, if you hail a ride with the Uber app, Elastic will process the data to locate the nearest riders. Or if you look for a date on Tinder, the system will make the right match.
How Does ESTC Make Money?
So how does Elastic make money? Well, it’s a blended model. Note that a large number of features are free and some require a paid subscription. And in contrast to a typical open source company, Elastic has not created a separate enterprise version, which allows for more control. Elastic is also available for on-premise installations, in public or private clouds or hybrid environments.
According to the Elastic IPO filing: “As the technology landscape shifts, our products grow and adapt. In that sense, we believe that our company is truly elastic.”
As for growth, Elastic has been red hot. During the quarter ended July 31st, revenues spiked by 79% to $56.6 million and the customer based went from more than 5,000 to over 5,500.
There is also quite a bit of room for growth. Based on data from IDC, the total addressable market opportunity for Elastic is a staggering $45 billion. This is based on the multitude of use cases, such as content analytics, AI (Artificial Intelligence) and predictive/prescriptive analytics.
Bottom Line on Elastic Stock
ESTC stock is far from cheap. Consider that the valuation is at 27X times the trailing 12 months revenues. Even among the recent batch of tech IPOs, this is on the high side.
In other words, there is not much margin for error. Just a small disappointment could hit the shares. Hey, take look at what happened to Stitch Fix (NASDAQ:SFIX) last week, when the shares plunged because of a less-than-stellar earnings report.
So for ESTC stock, there should be some caution here.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
