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Why Elastic N.V. Plunged More Than 11% Today

What happened

Shares of Elastic N.V. (NYSE: ESTC) fell 11.8% as of 3:39 p.m. ET Thursday, amid another tough day for high-multiple technology-growth stocks.

Yet Elastic fell even harder than others, as it announced a slew of management changes to its C-suite. With uncertainty rising over the path and speed of interest rates, more uncertainty in terms of Elastic's management team was enough to bring out the sellers.

Image source: Getty Images.

So what

In a press release, Elastic notified investors that Founder and CEO Shay Banon would be stepping down from the CEO role and replaced by Ashutosh (Ash) Kulkarni, who joined Elastic one year ago as its chief product officer. Banon is also stepping down from his role as chairman of the board and will be replaced by lead independent director Chetan Puttagunta. Furthermore, President of Worldwide Field Operations Paul Appleby announced he would be leaving the company.

That's a lot of pieces moving around at once, so it's not surprising the announcement rattled investors. The company is searching for a new chief product officer and, likely, a replacement for Appleby, as well.

In addition to general uncertainty, a big reshuffling of management sometimes makes investors think there's something amiss with a company's direction that needs to be fixed. However, there were a couple of silver linings in the announcement investors shouldn't ignore, either.

First, Banon isn't leaving the company, but rather returning to his previous role as chief technology officer (CTO). In the release, he said, "Elastic is my life's work, and in my role as CTO, I'll be laser-focused on innovation and product, and people and culture -- where my greatest passions lie." Perhaps Banon, who had served as CEO for five years, is merely returning to a role where he feels he will be more productive and helpful to Elastic at this point in the company's life cycle.

Second, Elastic also pre-announced that it expects to exceed its guidance for revenue and adjusted profits this quarter. It appears as though the company is making the change at a time of business strength, not weakness.

Now what

This management change seems kind of similar to the C-suite shakeup at Elastic's larger competitor Splunk (NASDAQ: SPLK), which was announced late last year. Splunk also saw its stock price plunge that day, but has since stabilized around those lower levels.

Elastic has now been more than cut in half from its highs, and its valuation is much more reasonable today at around 12 times sales.

It's very difficult to know if growth stocks are bottoming or if there will be more pain ahead, as the path of inflation and interest rates seems unpredictable. However, as large companies' digital infrastructure grows and cyber threats proliferate, I think the application observability and cybersecurity spaces will continue to grow strongly this year. That should bolster Elastic's and its peers' financial results in 2022.

Both Splunk's and Elastic's CEO changes seem to be a shift from entrepreneurial leaders to more established business executives who have led large-scale companies. It's entirely possible these changes are bringing in executives with the experience to enable high-growth at a much larger global scale.

Therefore, the recent sell-off could be an opportunity. That's why Splunk was among my favorite software-as-a-service stocks to begin 2022, and I'll be looking into Elastic, as well, now that it's been thoroughly discounted.

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Billy Duberstein owns Splunk and has the following options: short January 2022 $100 puts on Splunk, short January 2022 $110 puts on Splunk, and short January 2022 $85 puts on Splunk. His clients may own shares of the companies mentioned. The Motley Fool owns and recommends Elastic and Splunk. The Motley Fool has a disclosure policy.


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