Elastic Is Being Stretched Thin as Macro Headwinds Continue to Affect Business

We are maintaining our $62 fair value estimate for narrow-moat Elastic ESTC after the firm reported third-quarter sales largely in line with our estimates. The firm’s bottom-line results exceeded our expectations as the benefits from the layoffs announced by the firm last quarter pushed down operating spending. Despite the improved profitability, we expect continued weakness in demand for the upcoming few quarters as clients continue to rein in certain spending as they optimize costs in a challenging macroeconomic environment. With shares down around 2% afterhours, we would recommend investors seek a larger margin of safety to invest in this Very High Uncertainty-rated company.

Third-quarter sales clocked in at $275 million, up 23% year over year. As in the prior quarters, management highlighted elongated sales cycles as Elastic’s customers continue to rethink their IT spend and batten down the hatches amid a turbulent macroenvironment. We believe this macroinduced tightness will continue for the next few quarters and are modeling a rebound in demand for Elastic’s solutions in the second half of fiscal 2024.

We are impressed by Elastic cloud’s continued strength with cloud-based sales growing 33% year over year. Elastic cloud sales now constitute around 40% of the firm’s top line, up from 36% a year ago. As with other companies under our coverage, customer acquisition continues to decelerate. Elastic saw an 25% increase in the number of customers with an annual contract value, or ACV, of greater than $100,000. This growth rate, while impressive, is lower than the growth Elastic has seen over the last few quarters. During a tight macro environment, we are seeing customer reluctance to onboard new IT solutions which may be a factor behind Elastic’s customer acquisition growth decelerating.