Welcome to Deep Web Value. I appreciate every subscriber, thank you. As an experienced web developer, entrepreneur, and investor, I feel I have a unique view on valuing technology companies. I want to share, and hope that all my readers find value in it.
About the format. After founding my business, the way I looked at my holdings changed. The ups, and downs of stock prices became irrelevant. I believe that a successful retail investor needs to deeply understand business, find strong companies, and hold.
I judge companies by the same criteria that I judge my own business; problem, solution, market, competition, business model, needs, team, culture, vision, and performance. In Deep Web Value, I evaluate based on these.
Elastic
Elastic, formerly Elasticsearch, has been largely misunderstood by investors since its IPO in September, 2018. It brands itself as “the search company” but what does that mean? Isn’t Google the search company? I choose the proverb “the proof is in the pudding“ as the subtitle for this issue because if you look deep at the business you will find it’s value.
Lyft has millions of drivers, but a driver is usually matched with you within seconds. Netflix has thousands of options to choose from, but users expect to find that show they heard about immediately. IT professionals might be asked to find a users login from TeraBytes of unstructured log files. Good search is like good service, if you can’t remember it, that’s a sign it was done right. Search is complex but needs to feel simple, this is the problem that Elastic aims to solve.
The Elastic Stack, a set of software products that ingests data, stores it, and makes it available for search, and analysis in seconds. There are many different applications for search; searching the web, searching a SQL database, searching unstructured data, etc. Elastic solves searching unstructured data. Think of the search bar in a social media or e-commerce application. What is supposed to happen when you enter “Red” into the search bar? How does someone find the blog they’re looking for with just a keyword? Elastics products outsource this problem from that online retailer, or media site.
Elastic serves 4 main customer types; application companies, IT companies, governments, and cyber security companies. Search is pertinent to these establishments and most don’t have the time, or resources to do it themselves which makes Elastics product suite an attractive option. Essentially anyone doing business digitally is a potential customer. I can’t imagine a number or ceiling for this market, but it’s clearly large and growing for the foreseeable future which gives Elastic a nice growth opportunity.
Elastic calls itself the “Search Company”, I don’t know of another that makes this claim, or that any one company offers a solution to the same set of search problems. However, when broken down by use case there are other options.
In the case of an IT or Security administrator searching through network application logs, offerings from Splunk (SPLK) and Datadog (DDOG) overlap with Elastics ELK product suite.
On the analytics and data store side, Elastic competes with Cloudera (CLDR), Datadog, and others.
In the case of searching, it depends on the specific requirements but there are open source solutions from Apache and for more structured search, databases like MongoDB (MDB), SQL from Oracle (ORCL), and Microsoft (MSFT).
Elastics business model uses a “foot in the door” approach of offering free to use software and aims to sell its adopters proprietary software at a later time. They do this by making the free software extremely approachable, it aims to work “out of the box” and have a great developer experience.
By doing this Elastic inserts itself into the tech stack of many organizations, and the developers using it become internal advocates of the product. The paid offerings offer quick solutions to hard problems like security, and deployment once the free products are in use. This makes Elastics paid products an easy choice for decision makers once these problems arise.
In order for Elastic to gain more market share, it needs to see more adoption of its free software to drive its business model. Another way for Elastic to see high growth is for more companies to adopt SaaS solutions rather than in house implementations.
Because elastics cloud offerings are not open source, if customers choose the convenience of a managed solution, elastic gains a paying customer.
Elastic is led by it’s engineering founder and CEO Shay Bannon, who created the initial versions of Elasticsearch, then formed a community of users, and later teamed up with other indie hackers Steven Schuurman, Uri Boness, and Simon Willnauer to round out the ELK product suite and found the company in 2012. All of them remain at the company now a decade later. This is a developer led company which lends itself well to its business model.
It’s always hard to judge a companies culture from the outside but fortunately with all the online communities you can get an impression of what it’s like on the inside.
Glassdoor - The employee reviews give tell tale signs of a company that has experienced rapid growth and hasn’t quite found it’s stride at it’s new size yet. I see a mix of happy new employees, fed up employees, and loyal but nostalgic for the early days employees.
Reddit - Posts mention passionate employees that are fans of the tech and distributed.
Github - Elastic builds in public so anyone can view the code for products like Elasticsearch, Logstash, and Kibana.
Code commit logs can be very telling as to how a development team operates. Each project has its own style of messaging and they vary in consistency. This tells me that the teams for each function independently, with some overlap from engineers that either work across the stack or rotate between. Each team probably operates under separate leadership and procedures, and relies on experienced people who take ownership of problems and work mostly in isolation.
Job Postings - Job reqs can be a great window into a companies culture, as they are written internally and reflect the personalities and culture of the company. The first thing I notice from the job board is that most engineering roles are for Sr. or Principle people. The next thing I notice is that they ask a lot from their engineers, descriptions often state that you are involved in design, development, testing, and customer outreach.
Engineers that can reliably fills these roles are in high demand, and compensation needs to be competitive. Also all engineering roles appear to be remote.
In the ever increasing digital world the importance of search will only grow, and technology like that of Elastic will not only be in demand, but needed for enterprises to function.
Performance
Financial reports contain a lot of information, but they can be boiled down to key values. These are the numbers that I care about most.
Elastic year ended April 30, 2021 - Source
Revenue …………………………………………………………………………………………………………………….$608.489MM
Profit ………………………………………………………………………………………………………………………..$447.435MM
Free Cash Flow …………………………………………………………………………………………………………..$18.316MM
Future Revenue Projection …………………………………………………….$826MM - $832MM (+26.59%)
Personal Thoughts
In an increasingly digital world the type of search that elastic offers will be in high demand. When I look at the current trends I see organizations migrating their businesses to the cloud, finance becoming more digital than ever, cash fading, and all with consumers that demand information and analytics instantly and on demand.
On the upside Elastic is well positioned in the problem space, and offers an accessible and powerful solution to the problems that more and more organizations are facing.
On the downside as the search market is growing, so are Elastics competitors, they will need to get through their growing pains, and keep the focus on their products and market to be successful in the future.
Thanks for reading!
Find me on twitter, where I share what I’m learning, and working on - @alex_goley
Are you looking for portfolio tracking? Checkout EZFol.io a solution I’m building because it’s 2022 and I think we deserve better tracking than a spreadsheet.
Join our discord where I share updates to EZFol.io, interact with users, and post more content from Deep Web Value.