Elastic Management Cops to Poor Estimate, Driving Change in Share Price

We are seeing the Portfolio’s shares in Elastic NV ESTC rebound on Thursday. While some of that may be tied to reports that President Trump and China’s Xi Jinping agreed to jumpstart trade talks, it also has to do with the comments made during Elastic’s presentation at the BofA Global Technology Conference.

Those comments confirm those we shared with you last week that management’s guidance was overly conservative for the coming quarters. It was that guidance that led ESTC shares to plummet last week, a move we capitalized on earlier this week by picking up another slug of ESTC shares.

So, what were the comments made by the Elastic management team?

"…what we did at the time was talk about our guidance in the context of what we knew and what we didn't know. What we knew was obviously how Q4 was performing and Q1 was performing. Relatively speaking, we had a very benign macro impact specific to U.S. public sector civilian. And that's the only sort of macro impact we saw in Q4. And despite that, we had a strong quarter. When we issued our full-year guidance though, we didn't want to just assume that was going to be stable.

"And we laid out our assumptions in providing a much more conservative view for the full year and assuming macro gets worse than what we saw. So, we didn't see a bad macro, but we don't know at this point, so our guidance reflects that macro conservatism. And we think absent macro, there's plenty of ways for us to beat that guidance that we provided.

"…there are multiple paths for us to exceed the guidance that we provided."

That, of course, is music to our ears, especially since it confirms the thoughts we shared in our note to members discussing last week’s earnings report.

We continue to see Elastic benefitting from AI adoption as it should drive favorable pricing and margins. As we track oncoming economic data and what it tells us, we will continue to monitor corporate and government spending as well.

Based on this confirmation of overly-conservative guidance, we reiterate our One rating and suspect that Elastic continues to deliver beat-and-raise quarters and that recent price target cuts are likely to be reversed.

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At the time of publication, TheStreet Pro Portfolio was long ESTC.