The Elastic IPO

At this time last year, it was all about the ICO and Crypto.

Today, Elastic ($ESTC) will be one of the hottest IPO’s of 2018 that most have never heard of.

I know of it because Stocktwits is a user and so are so many companies/apps we use everyday

My friends at IPO Candy have a good piece on it:

The name of the company is a little misleading. It’s true that the core product “Elasticsearch” provides a search and analytics engine. But it does this as a data store. That means for *some* applications it can obviate the need for a separate database to be the system of record. For example many applications that might require MongoDB ($MDB) could use Elastic instead. (Read more in the competition section below for what me mean about overlap between databases and Elastic.)

Elastic is really a data management company that puts search functionality at the core of their design vision. The “Elastic Stack” includes a development console (Kibana) and tools for ingesting and enriching data which are the domain of “extract, transform and load” ETL tools from companies like Talend ($TLND).

Elastic is also built to be embedded in other applications. The company cites companies like Uber, Instacart and Tinder where Elastic is the “engine inside” their applications. Elastic can also run completely inside a customer data center or in the cloud hosted on AWS, Google Cloud, or Azure. This removes a key obstacle for some enterprise customers who either can’t or won’t run everything in the cloud.

Why do investors love these type of companies?

Elastic has a subscription-based, open-source rooted business model which is what customers and investors like best. The majority of the subscription revenue is for on-premise deployments but the cloud portion is growing even more rapidly then the overall business. Revenues for the fiscal year ended April 2018 were up 81% to $160M. The company still has negative operating margins but their business model and 70%+ gross margins should translate into 20%+ operating margins when the company is more mature.

As a rule I watch IPO’s for 6 months before I consider buying them. Two I have broken the rules for are Chipotles back in the day and Spotify. I might do the same with Elastic.

Also published on Medium.