Author Topic: ESTC - Elastic  (Read 4188 times)

RuleNumberOne

  • Sr. Member
  • ****
  • Posts: 499
Re: ESTC - Elastic
« Reply #10 on: December 07, 2019, 10:53:41 AM »
I have set up ELK (for my job) - the procedure is on the Internet in message boards and tutorials. There may be cases where customers don't want to do it themselves and buy a service plan from Elastic. Elastic then is just a labor arbitrage business. They can't charge too much or someone else may do it for less. If you buy product/service X from company Y, the vendor would have engineers who set up ELK for free, thereby cutting out Elastic. Elastic needs to find enough customers who can't do it themselves.

But it does appear that a lot of people are willing to pay for log management - SPLK and DDOG. I don't think it can be a profitable business though. Where are the GAAP profits? Splunk IPO'ed in April 2012, close to the start of this bull market.

Your point about averaging down is a good one, but it depends on the experience-level of the investor.
People might average a stock all the way down to zero, as often happened in 2008. If the longest correction someone has ever seen has lasted 2 months, they may average down a stock that has gone from $100 to $80. Many investors in today's market haven't seen their stocks go from $100 to $20.


For the vast majority of people, I imagine this business is just outside their circle of competence.
I have started to follow ESTC as well as other clout companies and I think it is true for the majority of people who “invest” in these companies. It certainly applies to myself.

I have a material science and physics background and work in adjacent industries and can understand in broad terms how DD customers  think about their products, pricing power, replacement hurdles for example. I have no such idea about ESTC products. From my experience a lot of people who own these stocks don’t have it either. The crucial test is always if they average down , in case the stock price drops. After all, if something truly becomes cheaper , why wouldn’t you want to own more.? Of course there is always the very real risk of  thesis being broken, but if you can’t tell a real problem from a perceived or transient one, what do you really know?

I have seen quite a few folks on twitter owning and then selling these when the stock breaks down.  That in my opinion, is just momentum investing.

As far as many SAAS stocks, including Elastic are concerned, one of my concerns is with classification of cost. Who can tell what is really operating expense and what is marketing or R&D? With a bit creativity, ai can do custom work for a customer for free and call it R&D and /or marketing expensive  and one can probably do so repeatedly. That makes the gross margin appear higher than it really is and gives the promise of becoming very profitable in the future, even though it never will, be sure they can’t wean of customers from freebies.

I am not in the software business, but I can confirm that the above exists, in real business. It’s easy to hide and hard to tell apart from the outside as long as the company is growing fast.

This is just one issue they I have a hard time being comfortable with.
« Last Edit: December 07, 2019, 10:57:55 AM by RuleNumberOne »


brianr27

  • Newbie
  • *
  • Posts: 17
Re: ESTC - Elastic
« Reply #11 on: December 07, 2019, 02:28:39 PM »
There are some insightful comments on glassdoor especially this one:

https://www.glassdoor.com/Reviews/Employee-Review-Elastic-RVW26181872.htm

Spekulatius

  • Hero Member
  • *****
  • Posts: 5918
Re: ESTC - Elastic
« Reply #12 on: December 08, 2019, 09:31:13 AM »
I have set up ELK (for my job) - the procedure is on the Internet in message boards and tutorials. There may be cases where customers don't want to do it themselves and buy a service plan from Elastic. Elastic then is just a labor arbitrage business. They can't charge too much or someone else may do it for less. If you buy product/service X from company Y, the vendor would have engineers who set up ELK for free, thereby cutting out Elastic. Elastic needs to find enough customers who can't do it themselves.


Since you are in the IT business, it would be beneficial for me and possibly for others to understand what made you chose ESTC product compared to competitors like DDOG, the AWS solution or Splunk etc. Also, do I understand you correctly and you just use the “freeware?” ESTC open source solution that doesn’t really cost you anything?

I am not too hung up on EV/revenue multiples or even GAAP profit metrics if I understand why their product is better than competitors and might continue to be so in the future.
Life is too short for cheap beer and wine.

RuleNumberOne

  • Sr. Member
  • ****
  • Posts: 499
Re: ESTC - Elastic
« Reply #13 on: December 08, 2019, 12:32:26 PM »
Yes, Elasticsearch-Logstash-Kibana (ELK) is free (if you install it and manage it yourself) whereas Splunk and Datadog are paid proprietary non-open-source products. Elasticsearch/Lucene is used by a lot of public companies for other search features and ESTC has nothing to do with it. You don't have to pay ESTC a penny to use ELK. ESTC doesn't own it. Just like ESTC, AWS also has a paid service to manage Elasticsearch or ELK. So you can either do it all yourself, or pay ESTC to do it, or pay AWS to do it.

I think all three companies (ESTC, SPLK, DDOG) are primarily labor arbitrage businesses (and a lot of the labor compensation is in stock which gets waived away with a non-GAAP EPS). Instead of doing it yourself, just outsource it. It is not as if the software is too complex, but the combined market cap of these 3 companies is $40 billion! One model we can use is that the cloud is moving all the on-prem opex to the "cloud" companies. For an external onlooker it becomes hard to say how much of "cloud" revenue is just labor arbitrage that may never be profitable.

If you are a cloud company with an insanely high valuation, just pay in stock and report a non-GAAP EPS. Another important thing is the reported SBC can be far lower than the shareholder dilution. For example, if we issue 10 million pre-IPO options for a stock that would hit $100, we can report an SBC much lower than $1 billion because of all the assumptions that go into Black-Scholes stock option pricing. This is very common and you won't see the fake-SBC-expense effect wear off until many years after the IPO. Even the start of vesting can be a few years after the IPO.  You can report $50 million in SBC instead of the $1 billion that shareholders get hit with.


I have set up ELK (for my job) - the procedure is on the Internet in message boards and tutorials. There may be cases where customers don't want to do it themselves and buy a service plan from Elastic. Elastic then is just a labor arbitrage business. They can't charge too much or someone else may do it for less. If you buy product/service X from company Y, the vendor would have engineers who set up ELK for free, thereby cutting out Elastic. Elastic needs to find enough customers who can't do it themselves.


Since you are in the IT business, it would be beneficial for me and possibly for others to understand what made you chose ESTC product compared to competitors like DDOG, the AWS solution or Splunk etc. Also, do I understand you correctly and you just use the “freeware?” ESTC open source solution that doesn’t really cost you anything?

I am not too hung up on EV/revenue multiples or even GAAP profit metrics if I understand why their product is better than competitors and might continue to be so in the future.
« Last Edit: December 08, 2019, 12:39:52 PM by RuleNumberOne »

hasilp89

  • Newbie
  • *
  • Posts: 48
Re: ESTC - Elastic
« Reply #14 on: January 23, 2021, 12:49:38 PM »
I never invested initially 1) circle of competence 2) it appeared that it wasn’t that valuable as an open source model (Amazon was able to sell it as it’s own).

I’ve kept an eye on just for fun. Saw news about them going to a license model. Basically an FU to Amazon.

Am I right in thinking this has a big impact on how they can/will make money going forward - in short it’s better for them financially.


https://www.elastic.co/blog/license-change-clarification

https://twitter.com/kimchy/status/1351534442993446917

MattR

  • Newbie
  • *
  • Posts: 32
Re: ESTC - Elastic
« Reply #15 on: January 23, 2021, 01:49:57 PM »
I have sold most of my position. I use Elastic in my job and think it a great product, but I don't think that the current market cap is justified. My model had them at 140$ in  2022, and they already shot over that quite a lot. I still think it is a company that will have a bright future. I will wait for a market pullback and then buy back again.

Spekulatius

  • Hero Member
  • *****
  • Posts: 5918
Re: ESTC - Elastic
« Reply #16 on: January 23, 2021, 04:01:32 PM »
I never invested initially 1) circle of competence 2) it appeared that it wasn’t that valuable as an open source model (Amazon was able to sell it as it’s own).

I’ve kept an eye on just for fun. Saw news about them going to a license model. Basically an FU to Amazon.

Am I right in thinking this has a big impact on how they can/will make money going forward - in short it’s better for them financially.


https://www.elastic.co/blog/license-change-clarification

https://twitter.com/kimchy/status/1351534442993446917

Sounds like they essentially forked the tech roadmap for their userbase. Either stay with the open source branch or go with the ESTC branch? This doesn’t seem risk free for them either.
The argument to begin with for open source is that it helps with the land grab in the new space, I think.
Life is too short for cheap beer and wine.