Search software developer Elastic has filed for an IPO, which means that we have yet another tech company looking to take advantage of the ongoing boom times. TechCrunch reported that Elastic’s IPO will likely happen this fall, and will trade under the NYSE under the banner ESTC.
We do not know how much Elastic plans to raise as they used a placeholder value of $100 million in their S-1 report. We know that their valuation was $700 million back in 2014 when they raised $100 million in venture capital, and that they are likely pursuing a valuation of at least double that. For now, the most important step is to understand this company’s fundamentals – and realize that while you may have never heard of Elastic before, its successful IPO could have major ramifications for the tech IPO market.
A Different Kind of Search
Elastic is a search company, but it is a different kind of search compared to Google or Bing. Elastic’s search is aimed towards companies, which use its search capabilities to comb through large sets of data and draw effective solutions. To give one example mentioned in its S-1, Elastic helps power Uber’s efforts to search and locate the best, closest drivers when a customer calls for a vehicle. The company provides open-source software as well as a commercialized variant in a subscription model. Customers include major companies like Sprint, Softbank, and Uber.
Search is going to continue to be in high demand. Users will continue to demand more from apps. Companies embracing Big Data will have to efficiently sort and find relevant information from said data. Elastic is in shape to take advantage of this with its search functions as well as a growing focus on cognitive/AI software platforms.
Elastic’s financial health is fairly typical for a tech IPO, with high revenue growth but a lack of profitability. Revenue increased from $88 million in the year ending April 30, 2017 to $159 million in 2018. Most of the revenue growth came from an increase in subscription revenue, which rose from $79 million to $149 million. While this does look good, Elastic has not provided financial information before 2017, which should provoke concern about how long it has been rapidly growing.
On the downside, Elastic reported net losses of $52 million and $51 million in 2018 and 2017 respectively, though the loss per share did decrease. Elastic has $51 million in cash, and an accumulated deficit of $233 million as of July 31, 2018. Investors should have some concern about the lack of profitability and high debt, but this can be overshadowed by Elastic’s continuing growth.
But will the company be able to grow in the face of intense competition from larger companies? Elastic offers a wide variety of software, whether in its search capabilities or its data processing pipeline Logstash. But that means that each sector of its business faces heavy competition from numerous competitors, most notably Google and Amazon. Amazon is interesting because Amazon Web Services uses some of Elastic’s open source software even though the two companies do not have a partnership. However, Elastic’s ability to grow for now does signify some ability to stand up to these companies.
An Open Source Boom?
The tech IPO market has been hot for some time now, as companies like Dropbox (NASDAQ:DBX) and DocuSign (NASDAQ:DOCU) have had successful IPOs with others like SurveyMonkey looking to go public this fall. But what makes Elastic special is that its potential success could be a signal for other, open-source software companies to go public.
Of course, other open-source companies such as Cloudera (NYSE:CLRD) and MongoDB (NASDAQ:MDB) have had successful IPOs and shown that open-source companies can thrive by selling upscaled variation of their software to enterprises. But Elastic is much less well known than Cloudera, which was valued at $2.3 billion at the time of its IPO. If Elastic succeeds, it could persuade other, smaller open-source companies that they can succeed going public as well. Another open-source company called DataStax could be considering an IPO soon, and other potential targets include Couchbase and MapR.
Elastic is not a company which will attract a huge amount of hype for its IPO, and there are reasons to be concerned about its prospects such as its ability to stand up to larger competitors and its lack of profitability. But its current growth as well as its potential given the importance of search means that investors should keep an interested eye on this company until we know more about its intended valuation and price.
And as noted, perhaps the real story is that the Elastic IPO could be the beginning of a wave of open-source software companies joining the tech IPO boom. That alone should be reasons for investors to hope for a successful Elastic IPO.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.