The Zacks Analyst Blog Highlights: Elastic, Beyond Meat, Uber and CBRE
For Immediate Release
Chicago, IL –September 9, 2019 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Elastic ESTC, Beyond Meat BYND, Uber UBER and CBRE Group CBRE.
Here are highlights from Friday’s Analyst Blog:
Elasticis a $7 billion big-data analytics provider that does the heavy lifting of searching for "dark data" that companies need to gather and process.
I borrowed the phrase "dark data" from Splunk, another heavy duty data engine you've probably heard of, because it describes the flood of log files and other digital data that companies must collect and harness. But first they must find, clean, and prep it before they can use it to model any business processes and gain insights from them.
Elastic's primary product/service is Elastic Stack, a set of software applications that ingest and store data from various sources and formats, as well as perform search, analysis and visualization functions.
The company is growing sales at 51% this fiscal year (ends next April) to $410 million. The average Street price target is now $107, with BofA/ML moving to $137, after a solid Q1 2020 (ended July).
Elastic reported strong results with total revenue coming in at $89.7 million, exceeding consensus by $6.2 million, on 58% growth. Subscription revenue growth was 59.6% y-o-y vs. 59.4% last quarter. Net revenue retention was above 130% for the 11th consecutive quarter on broad-based customer expands.
KeyBanc raised estimates and reiterated their Overweight rating with a $110 PT citing "a compelling growth opportunity driven by an expanding number of use cases in security, log management, search, and monitoring."
Most covering i-banks raised their estimates on 8/29 after the report. Consensus revenue now stands at $410M for the year, for 51% growth. That's better growth than Atlassian or Coupa (28-32%) at a Price-to-Sales valuation of 13X (closer to TEAM's 10X than COUP's 20X).
Now ESTC is a Zacks #2 Rank as estimates have risen. Here's what I told my TAZR Trader group on 9/4 when we took a stake...
I like the way this October IPO is digging into support on its 6-week old 200-day moving average at $82. I want a stake now in an area offering 3:1 Reward-to-Risk, but will be fully prepared to add under $80 if that chance comes again. New highs above $100 are in store relatively soon.
In the buy alert, I forgot to mention yesterday's good news and these Q1 subscription metrics...
· Total subscription customer count over 8.8K (from 8.1K in Q4)
· Total customer count with ACV greater than $100K over 475 (from 440 Q4)
· SaaS revenue increased 71% y/y (77% excluding FX)
· Subscription revenue represented 92% of total revenue
· New wins and expansions included: TomTom, U.S. Navy, Freddie Mac, NVIDIA.
Elastic launches Elasticsearch service on Microsoft Azure
Elastic announced the launch of Elasticsearch Service on Microsoft's Azure for its managed service users who want more cloud provider options. Organizations that have standardized on Azure will now be able to enjoy the convenience of a fully managed Elasticsearch service on their preferred cloud platform.
This is an important partnership given that Elastic competes with Amazon AWS on these services.
Here's how Barclays addressed it in late June when shares were shares were finding support in the low $70s...
Analyst Raimo Lenschow believes the bear thesis for Elastic around competition from Amazon Web Services Open Distro is overblown. The features released by AWS will likely help it convert a share of the millions of free users onto its platform, but Elastic focuses on large scale deployments, Lenschow told investors in a research note. This is where Elastic will continue to generate the vast majority of its sales growth, says the analyst. He believes the company's runway of growth with enterprises is unaffected by Open Distro and encourages long-term investors to buy into the recent share weakness caused by the lockup expiry. Lenschow reiterated an Overweight rating on Elastic with a $108 price target.
(end of TAZR notes from 9/4)
The Elastic Effect
Elastic is in the early stages of capitalizing on a large $45 billion TAM (total addressable market). The company has emerged as the leading modern search platform benefiting from a broad number of enterprise use cases across application search, log management, analytics, infrastructure monitoring, and security.
KeyBanc analysts say "The current growth trajectory, breadth of enterprise use cases, and growing popularity with 350M+ software downloads give us confidence the business model can scale to $1B+ revenue within five years as it gains share within a large $45B TAM."
Is WeWork Planning to Slash Its IPO Valuation?
The We Company, parent company of WeWork, is reportedly considering lowering its total valuation significantly in a planned initial public offering that could come as early as later in September. The move would be a strong indication that investors are raising the level of scrutiny they are applying to shares of high-flying tech companies as they make the transition to being traded in public equity markets.
In the latest round of private equity financing, WeWork was valued at $47 billion, but speaking on the condition of confidentiality, bankers with knowledge of the proposed deal now say that a public valuation of $20 to $30 billion is more likely.
2019 has been a huge year so far for highly anticipated IPOs, and the results have been mixed. While some companies like Beyond Meat have held onto double and triple digit gains – up 44% and 140%, respectively – Rideshare companies Uber have been enormous disappointments. Both currently trade at or near all-time lows.
Over the past nine years, WeWork has become one of the largest tenants of commercial real estate in many major metropolitan areas - including being the single biggest lessor of space in New York City. The company signs long-term leases for large blocks of space, converts them into attractive and high-tech workspaces and subleases space for shorter periods to entrepreneurs and startups.
The average term for the office space WeWork leases is around 15 years, while it’s average sublease is closer to two years. Customers who are mostly small, new businesses value the flexibility of shorter leases as they attempt to grow – presumably hoping to move to larger facilities – but the arrangement does leave WeWork on the hook for the remainder of the longer leases in the events that customers move on and the space is not re-leased.
It’s definitely a high-growth industry. CBRE Group estimates that only about 2% of commercial square footage is currently dedicated to flexible leasing arrangements but says that number could grow to 10% over the next decade. Late in 2018, CBRE announced that they would be launching their own flexible office space product to compete with WeWork and the European commercial real estate company IWG, which operates in the US and 120 other countries under the brand name Regus.
WeWork's S-1 statement, filed with the SEC in anticipation of the IPO, highlights several of the risk factors for potential shareholders. The company had $1.8 billion in revenues in 2018, yet posted an operating loss of $1.8 billion – largely due to the high costs of modifying office space with the perks tenants appreciate. Through the first six months of 2019, revenues grew to $1.54 billion but so did losses – to $1.37 billion.
Investors tend to be fairly tolerant of losses at early-stage startups, but critics point out that despite branding themselves as high-tech, WeWork is actually only offering a shiny version of a decidedly low-tech product. Though the company has been extraordinarily successful at gaining significant market share in the flexible space market, the lack of barriers to entry could mean that deep pocketed competitors could offer similar services – as evidenced by CBRE’s new flex offerings.
WeWork has the backing of Japan’s SoftBank Vision Fund which has approximately 10% of its $100 billion dollars in investible funds in WeWork. Lowering the offering price would lower the valuation of SoftBank’s stake considerably, but would also increase the chances of a successful offering and the potential for price appreciation to prospective shareholders.
SoftBank is still considerably underwater on the $7.6 billion they have invested in Uber over the past two years.
Analysts have also been casting a critical eye on WeWork’s proposed corporate structure which grants founder and CEO Adam Neumann majority voting power and gives his wife the discterion to appoint a replacement CEO should he die or become incapacitated - rather than leaving that decision to the board of directors. New shareholders will receive only one fifth of a vote per share owned.
Neumann also raised eyebrows by being a partner in the ownership of some of the properties that WeWork leases from, personally borrowing from the company at low interest rates and paying himself $5.9 million in return for the “We” trademarks.
Though Neumann has taken steps to extricate himself from the appearance of a conflict of interest in property ownership and returned the $5.9 million, even the hint of lax corporate governance is worrying, especially in the context of the bifurcated voting structure that would leave shareholders with limited recourse if they felt the CEO was not putting their interests first.
Even investors for whom a speculative IPO is not appropriate, the WeWork offering should be interesting as a barometer of how the equity markets assess value in highly anticipated deals.
Arguably, the criticisms of WeWork’s potential shortcomings is actually a sign that investors are doing serious due-diligence rather than blindly plowing cash into uncertain ventures. A successful offering at a lower price would signal rationality in the markets – a very healthy sign.
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