Over the past six months, Elastic’s stock price fell to $86.31. Shareholders have lost 10.1% of their capital, which is disappointing considering the S&P 500 has climbed by 7.6%. This might have investors contemplating their next move.
Is there a buying opportunity in Elastic, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Elastic Not Exciting?
Even with the cheaper entry price, we don't have much confidence in Elastic. Here are three reasons why there are better opportunities than ESTC and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Elastic grew its sales at a 19.8% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds. 
2. Operating Losses Sound the Alarms
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.
Elastic’s expensive cost structure has contributed to an average operating margin of negative 3.7% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if Elastic reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.
3. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Elastic’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 17.7% for the last 12 months will decrease to 17.2%.
Final Judgment
Elastic’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 5.3× forward price-to-sales (or $86.31 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of Elastic
Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.
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