Why Elastic (ESTC) Shares Are Trading Lower Today

Jabin Bastian /
2023/08/08 5:07 pm EDT

What Happened:

Shares of search software company Elastic (NYSE:ESTC) fell 5.56% in the afternoon session after competitor, Datadog, reported second quarter results in which its full-year revenue guidance was lowered and missed analysts' expectations, which is never a good sign. In addition next quarter's revenue guidance also missed Wall Street's expectations. Taking the outlook one step further, some are noting that it implies Datadog will exit the year growing less than 20% on the topline, a major deceleration from recent growth. To add color to the worrisome developments, Datadog management noted that Q2 usage growth was slower than Q1 and previous quarters; the slowdown in usage came with its larger spend and cloud native customers.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Elastic? Access our full analysis report here, it's free.

What is the market telling us:

Elastic's shares are very volatile and over the last year have had 33 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The previous big move was three months ago, when the company gained 5.63% on the news that stocks, especially tech names, rebounded following Microsoft and Alphabet's strong Q1 results, which surpassed top and bottom-line estimates to kickstart the new earnings season. Cloud services continued to be in high demand as Microsoft's cloud unit (Microsoft Azure) reported solid growth despite negative channel feedback and fears of cost optimization by customers. Google Cloud also beat estimates and Search growth was healthy, a good sign for the macro since advertising is a leading indicator. Azure and Google Cloud results were positive read-throughs for SaaS companies in general but particularly for those with revenue models where customers are billed based on the volume of cloud resources consumed due to aforementioned fears of customer spend optimization.

Elastic is up 18.6% since the beginning of the year, but at $59.49 per share it is still trading 34.5% below its 52-week high of $90.81 from September 2022. Investors who bought $1,000 worth of Elastic's shares at the IPO in October 2018 would now be looking at an investment worth $849.86.

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