Greenhaven Road Capital, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A commendable net return of 14% was recorded by the fund for the Q1 of 2021, outperforming the S&P 500 Index that delivered a 6.17% return for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Greenhaven Road Capital, in their Q1 2021 investor letter, mentioned Elastic N.V. (NYSE: ESTC), and shared their insights on the company. Elastic N.V. is a Mountain View, California-based search company that currently has a $10.5 billion market capitalization. Since the beginning of the year, ESTC delivered a -20.37% return, while its 12-month gains are up by 84.46%. As of April 30, 2021, the stock closed at $120.62 per share.
Here is what Greenhaven Road Capital has to say about Elastic N.V. in their Q1 2021 investor letter:
“ELASTIC (ESTC) – In the past, I have written about Elastic’s management team (missionary), their products (mission critical), and the benefits of an open-source freemium go-to market strategy (frictionless adoption). These inputs for success are all important reasons to own Elastic. If I had to pick the two reasons why I am willing to pay a growth multiple for this company, they would be net revenue retention and the under-monetization of their user base. I realize that is a lot of jargon, so let’s break it down. “Net revenue retention” is how much last year’s customers spent this year, as if no new customers were added. Elastic’s net revenue retention has been 130% or greater for several years, meaning that existing customers spent at least 30% more this year than last year on Elastic products and services. A company with net revenue retention at this level is the modern-day equivalent of a golden goose. This growth in spending comes from a combination of increased usage and adoption of additional products. Elastic does not disclose the exact percentage of net revenue retention other than to say that it remains above 130%, but they do give some attractive cohort data. Customers added in FY 2016 tripled their spending in the subsequent four years, customers added in FY 2017 more than doubled their spending in three years, and customers added in FY 2018 more than doubled their spending in two years. (Link to Elastic’s recent investor presentation)
Elastic Search does face the law of large numbers, and adding 30% per year should get harder and harder as the base grows. Fortunately, their current under-monetization should become a tailwind. The vast majority of Elastic users are non-paying. To put this in perspective, the company has less than 14,000 paying customers, while their software has likely been downloaded over one billion times (note: a single user can download multiple times as versions are released). Elastic has choices about what to include in their free vs. paid versions with the ability to “nudge” their non-paying customers to upgrade over time. This past quarter, they made a change to their user license to make it more difficult for Amazon to rip them off, and there will be additional changes to follow. With Elastic, we own a world-class management team that is selling mission-critical products to customers who buy more and more each year, plus this “insurance policy” of monetizing currently non-paying customers over time.
Despite the >30% spending increase by existing customers alone – continued even through a pandemic – consensus estimates have ESTC growing at 26% this year. I will take the over. I think the most unfortunate part about Elastic is that we will likely never get to see how long it can sustain net revenue retention at this level – I think it is likely that the company will be acquired for both its financial characteristics and the community of developers it has built. In my opinion, the only way Microsoft will ever get close to having a community like Elastic’s is by writing a $20 billion check.”
Our calculations show that Elastic N.V. (NYSE: ESTC) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Elastic N.V. was in 49 hedge fund portfolios, compared to 36 funds in the third quarter. ESTC delivered a -23.24% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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Disclosure: None. This article is originally published at Insider Monkey.
