3 Reasons ESTC is Risky and 1 Stock to Buy Instead

Over the last six months, Elastic’s shares have sunk to $62.75, producing a disappointing 9.7% loss - a stark contrast to the S&P 500’s 8.4% gain. This might have investors contemplating their next move.

Is there a buying opportunity in Elastic, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Elastic Not Exciting?

Even though the stock has become cheaper, we’re sitting this one out for now. Here are three reasons you should be careful with ESTC, plus one stock we’d rather own.

1. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Elastic’s revenue to rise by 14.6%, a slight deceleration versus its 23.4% annualized growth for the past five years. This projection doesn’t excite us and indicates its products and services will face some demand challenges.

2. Relatively Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for Elastic to acquire new customers as its CAC payback period checked in at 252.1 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

3. Operating Margin Rising, Profits Up

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses — everything from the cost of goods sold to sales and R&D.

Over the last two years, Elastic’s expanding sales gave it operating leverage as its margin rose by 1.8 percentage points. Its operating margin for the trailing 12 months was negative 1.9%, and it must keep making strides to one day reach sustainable profitability.

Final Judgment

Elastic isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 3.3× forward price-to-sales (or $62.75 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re fairly confident there are better stocks to buy right now. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.

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