This Little Known Company Could Provide a 73% Return in Two Weeks
We know some companies, like Netflix or Google, and we understand their products at some level. Many of us don’t understand the technology that allows Netflix to deliver movies or Google to deliver search results. But we know the company.
Some companies are less well known but could provide equally compelling, or even more compelling trading opportunities.
Elastic NV (NYSE: ESTC) is an information technology (IT) company based in the Netherlands. The company offers developers the Elastic Stack.
That’s a set of software products for data search and management, namely
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- Elasticsearch, a distributed, real-time search and analytics engine and datastore for all types of data;
- Kibana, the user interface and visualization layer for data stored in Elasticsearch;
- Logstash, a data processing pipeline for ingesting data into Elasticsearch or other storage systems from a multitude of sources simultaneously, and
- Beats, a family of lightweight, single-purpose data shippers for sending data from edge machines to Elasticsearch or Logstash.
The Elastic Stack is designed to run on premises, in public or private clouds, and in hybrid environments. The company’s business model is based on a combination of open source and paid subscription, which includes access to additional features, as well as support.
A Good Earnings Report Could Push the Stock Up
Business Wire recently reported that Elastic N.V. announced strong results for its fiscal second quarter. The report indicated total revenue was $63.6 million, growing 72% year-over-year. Deferred revenue was $127.3 million, growing 78% year-over-year.
“We are very pleased with our Q2 results; our team delivered strong revenue growth of 72% year-over-year,” said Shay Banon, founder and chief executive officer at Elastic.
“Search is an incredible foundation to enable our users and customers to address a variety of use cases. We’re proud of the pace of innovation across our self-managed and SaaS offerings and the rapid adoption of the Elastic Stack and our solutions by our users and customers.”
Adding more detail to the report:
- Total subscription customer count was over 6,300.
- Total customer count with ACV greater than $100,000 was over 340.
- Subscription revenue represented 92% of total revenue.
- Net Expansion Rate remained over 130% for the eighth consecutive quarter.
A number of new product releases could keep the company on track for further gains at that level. Management also provided insights into the company’s outlook in the coming quarters.
For the current quarter which wraps up at the end of January, the company expects revenue to be between $64 million and $66 million. Non-GAAP operating margin is expected to be between -30% and -28%, an improvement from last quarter.
Non-GAAP net loss per share is expected to be between $0.32 and $0.30, assuming approximately 71 million ordinary shares outstanding. This is also an improvement for the company.
For its fiscal year 2019 (ending April 30, 2019), total revenue is expected to be between $254 million and $258 million. Non-GAAP operating margin is expected to be between -26.0% and -25.0%.
Non-GAAP net loss per share is expected to be between $1.35 and $1.30, assuming approximately 56 million ordinary shares outstanding. This is in line with the expectations of nine analysts that follow the company.
The stock dropped slightly on the news.
The stock appears to be forming a base after an initial surge and pullback that followed that surge when the company began trading.
Trading the Trend
When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for ESTC
For ESTC, a bull put spread could be opened with the January 18 put options. This trade can be opened by selling the January 18 $60 put option for about $1.60 and buying the January 18 $70 put for about $5.85.
This trade would result in a credit of $4.25, or $425 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $10 ($70 – $60). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $575 ($1,000 – $425).
The potential gain is about 73% of the amount of capital risked. This trade will be open for a relatively short amount of time and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.