What a brutal six months it’s been for Elastic. The stock has dropped 43.2% and now trades at $49.79, rattling many shareholders. This might have investors contemplating their next move.

Is there a buying opportunity in Elastic, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Elastic Not Exciting?

Despite the more favorable entry price, we're cautious about Elastic. Here are three reasons there are better opportunities than ESTC and a stock we'd rather own.

1. Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Elastic’s billings came in at $520.8 million in Q4, and over the last four quarters, its year-on-year growth averaged 12.5%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Elastic’s revenue to rise by 13.6%, a deceleration versus its 24.8% annualized growth for the past five years. This projection is underwhelming and implies its products and services will see some demand headwinds.

3. Operating Margin Rising, Profits Up

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 is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Over the last two years, Elastic’s expanding sales gave it operating leverage as its margin rose by 4.5 percentage points. Its operating margin for the trailing 12 months was negative 1.7%, and it must keep making strides to one day reach sustainable profitability.

Final Judgment

Elastic isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 2.8× forward price-to-sales (or $49.79 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at a top digital advertising platform riding the creator economy.

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