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Is Elastic NV (ESTC) a Smart Long-term Buy?

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Alex Smith
·5 min read
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Greenhaven Road Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. Greenhaven’s estimated returns for the third quarter totaled approximately +50% net of fees and expenses. August was the best month in the partnership history. The net result is that both funds are up around 55% for the year, comparing favorably to the Russell 2000, which ended September down -8.7% year to date. You should check out Greenhaven Road Capital's top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Greenhaven Road Capital highlighted a few stocks and Elastic N.V. (NYSE:ESTC) is one of them. Elastic N.V. (NYSE:ESTC) is an open-source software company. Year-to-date, Elastic N.V. (NYSE:ESTC) stock gained 67.6% and on November 3rd it had a closing price of $99.98. Here is what Greenhaven Road Capital said:

"ELASTIC (ESTC) – We have been involved in Elastic for almost a year, and over that time I have gotten significantly more comfortable with the “open source” business model. On the surface, exposing the IP and giving the software away to most users is a bit of a head scratcher. The monopolistic robber barons of yesteryear may not approve, but there are distinct advantages to the model. Elastic has made trial incredibly easy and frictionless with zero cost. There have been hundreds of millions of downloads of their software. The result is that there is an unpaid army of users and developers who identify as being part of an Elastic community. It is a differentiated distribution. How many non-consumer-facing software companies can you name that sell “merch” such as T-shirts and stickers on their website? (link) For a tour de force of the open source business model, Patrick O’Shaughnessy’s podcast with Elastic investor and board member, Chetan Puttagunta is a must-listen. (link)

Elastic has a very strong tailwind. The value of their products increases as the amount of data and data sources a company has increase. In simple terms, the utility of a search tool is limited if you are only looking at 10 pieces of data from a single source. The same search tool is invaluable if you are looking at one billion pieces of data from 200 different data sources. Elastic typically does not price their products based on seat licenses but rather based on usage. This encourages trial of products as the cost is minimal if the usage is minimal, but it also allows Elastic revenue to be more closely tied to the data growth of their customers. The tailwind of increased data volumes and new products can be seen in the net revenue retention remaining above 130% for every quarter they have disclosed it. As very few of us are software developers or manage software for large enterprises, it may not be intuitive; why would one pay for Elastic when it can be used for free/open source? The primary reasons are the incentives of the employees. Elastic is very often a mission-critical part of an app/website/software. Large organizations often have policies that open source code being used in “production” must have a support contract attached to it. Do you really think the hard-working employees at Walmart or other large customers (link) really want to – or can – be going into user forums in the middle of the night if the Elastic component stops working properly for some reason? How about employees at a federal agency? The open source feature is great to encourage trial and adoption, but monetization opportunities still abound. The company currently has 630 customers with an annual contract value in excess of $100,000, and this number is steadily increasing.

Elastic is not a deep value investment, but with a sub-$10B market capitalization, massive installed base, and very attractive revenue retention numbers, it is a bite-size acquisition for any number of strategic buyers. My hope is that we get to compound our capital inside Elastic and alongside this management team for years."

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Copyright: hywards / 123RF Stock Photo

In July, we published an article revealing Greenhaven Road Capital bullish investment thesis on Elastic N.V. (NYSE:ESTC) stock in its Q2 2020 investor letter. This suggests that the investment firm has been bullish for a long time on Elastic N.V. (NYSE:ESTC).

In Q2 2020, the number of bullish hedge fund positions on Elastic N.V. (NYSE:ESTC) stock increased by about 30% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in ESTC's growth potential. Our calculations showed that Elastic N.V. (NYSE:ESTC) isn't ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:

Disclosure: None. This article is originally published at Insider Monkey.