From 2019 to 2023, Elastic maintained a prominent position in my investment portfolio. After realizing modest gains, I decided to divest, and the rationale behind this choice is discussed in detail here. Now, after a two-year hiatus, I am rekindling my interest in this B2B infrastructure software provider, which has successfully branded itself as ‚the Search AI Company.‘
Founded in the Netherlands, Elastic was already a leading player in the European software market before its IPO in the United States in 2018.
My first encounter with Elastic’s products occurred long before this, during my own software projects.
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Elastic’s market presence and potential
Elastic stands out among European software companies, distinguishing itself as a global player in the industry. Impressively, over 50% of Fortune 500 companies are on Elastic’s client list.
Despite its strong presence, Elastic’s stock has often gone unnoticed by many investors, even seven years post-IPO, landing in the category of ‚fallen angels.‘ This obscurity primarily stems from the company’s stock not recovering from the tech crash of 2022, with its value still over 50% below its 2021 peak.
Understanding Elastic’s technology
For those unfamiliar with Elastic, it is essential to recognize its role in the enterprise search landscape. Unlike typical search engines, Elastic focuses on enabling efficient access to specific data within businesses. Many of us have unwittingly utilized Elastic’s technology in various applications, from the Uber app that locates nearby vehicles to Tinder, which helps users find compatible partners, and cybersecurity services that monitor threats.
The backbone of this technology is Elasticsearch, a highly scalable real-time search engine capable of handling diverse data formats, including both structured and unstructured data.
Expanding product offerings
In recent years, Elastic has broadened its product portfolio, leveraging its core search technology. Notably, in 2019, the company ventured into the security market, transforming existing solutions for detecting and analyzing cyber threats into a standalone product offering. This marked a transition from being merely a component supplier to providing SIEM solutions (Security Information and Event Management).
Additionally, since 2020, Elastic has made significant strides in the observability sector, which enhances traditional monitoring systems to meet the demands of distributed systems. This shift has placed Elastic in direct competition with market leader Splunk, which was acquired by Cisco in 2024.
Focus on generative AI
As of 2023, Elastic has increasingly oriented itself towards new applications associated with generative AI. The company has upgraded its platform to emphasize vector search, a pivotal technology for semantic and AI-driven search applications. Elastic’s marketing efforts highlight the critical role its technology plays in facilitating generative AI initiatives, which have gained momentum across numerous enterprises.
Indeed, Elastic’s leading search technology appears well-positioned to enhance large language models (LLMs) by integrating knowledge from proprietary datasets, thus making them searchable within milliseconds.
However, the journey towards achieving sustainable success in these AI applications is still unfolding, and it remains uncertain whether these projects will translate into substantial revenue streams in the near future.
Reflections on investment decisions
In 2022 and 2023, a significant leadership change occurred within Elastic. The founder, Shay Banon, stepped down, and Ash Kulkarni was appointed as the new CEO. I chose to sell my Elastic shares in because I was skeptical about the capabilities of the new Chief Revenue Officer, Mark Dodds, who transitioned from a lengthy tenure at Cisco. I perceived a potential ‚culture clash‘ between the company’s open-source roots and Dodds‘ enterprise sales-oriented approach.
In hindsight, it appears my concerns were unfounded. Today, Elastic demonstrates a considerably improved efficiency in its sales and marketing strategies compared to two years ago.
Another pivotal reason for my initial exit was the soaring valuation of Elastic stock. Like many software companies, Elastic quickly pivoted towards the generative AI narrative, resulting in a 100% stock price surge to around $115, largely fueled by speculative optimism. At that time, the EV/Sales ratio surged to 9, with a cash flow multiple exceeding 70. These figures indicated an exceptionally ambitious valuation for a company that had been growing at less than 20% annually while still grappling with significant losses.
For a deeper exploration of my renewed investment in Elastic after a two-year pause, please refer to my more detailed post on my English-language Substack (subscription required).
Disclaimer: The author and/or associated entities own shares of Elastic. This article expresses personal opinions and does not constitute investment advice. Please review the legal disclaimers.
