From 2019 to 2023, I held Elastic stocks as a key component of my investment portfolio. After achieving modest gains, I decided to exit my position, a decision fueled by various factors outlined here. Now, after a two-year hiatus, I’m ready to re-establish my investment in this B2B infrastructure software company, which has rebranded itself as ‚the Search AI Company.‘
Founded in the Netherlands, Elastic made its mark as a leading software provider in Europe long before its public debut in the United States in 2018.
My own journey with Elastic began well before its IPO, as I encountered their innovative solutions while working on my software projects.
The distinctiveness of Elastic in the tech arena
Elastic stands out among its European software counterparts, not only for its impressive track record but also for its robust global presence. A staggering over 50% of Fortune 500 companies utilize Elastic’s offerings, solidifying its position as a significant player in the tech industry.
Despite its achievements, Elastic’s stocks remain somewhat under the radar among investors, often categorized as ‚fallen angels‘ even seven years post-IPO. This perception stems from the company’s struggle to recover from the tech downturn of 2022, with share prices still languishing more than 50% below their peak values from 2021.
Uncovering opportunities through familiarity
Sometimes, the most promising investment opportunities are those we are already acquainted with. Therefore, it’s time to take a closer look at Elastic once again, especially for those who might not be familiar with its offerings.
Understanding Elastic’s core offerings
For those new to Elastic, it’s essential to grasp the essence of what the company provides. Long before going public, Elastic was recognized as a leader in Enterprise Search, which focuses on efficient data retrieval within organizations rather than competing with search engines like Google.
Chances are, many of us have interacted with Elastic’s technology without even realizing it—be it through the Uber app, which locates nearby vehicles, or Tinder, which connects users with potential matches. Cybersecurity services also leverage Elasticsearch to identify threats, showcasing its capacity to sift through vast datasets in mere milliseconds.
Elasticsearch serves as a highly scalable, real-time search engine capable of handling various data types, both structured and unstructured. Over the years, Elastic has expanded its product line, creating diverse solutions tailored to critical use cases.
Expanding horizons: security and observability
In 2019, Elastic officially ventured into the security market, building upon earlier client deployments that utilized its products for threat detection and analysis. This transition marked a shift from being a component supplier to a provider of SIEM solutions (Security Information and Event Management).
Moreover, since 2020, Elastic has made strides in the observability sector, evolving from traditional monitoring systems to cater to the needs of distributed systems. This positioned Elastic as a direct competitor to Splunk, the market leader that was eventually acquired by Cisco in 2024.
As of 2023, Elastic has increasingly focused on new use cases surrounding Generative AI. The company has enhanced its platform with a focus on vector search, a crucial technology for semantic and AI-driven search applications.
The potential of Generative AI and its implications
Elastic’s product marketing emphasizes the significance of its technology in advancing generative AI initiatives, which many organizations are exploring. It’s reasonable to believe that Elastic’s leading search technology will play a vital role in enriching large language models (LLMs) with knowledge derived from proprietary datasets, making them searchable in milliseconds.
Recently, Elastic announced the launch of the Elastic Native Inference Service, a GPU-accelerated inference-as-a-service solution within Elastic Cloud. This development further positions the company as a key player in AI infrastructure, transcending its initial branding as merely a search engine.
Challenges and outlook
Nonetheless, the sustainable success of these AI applications remains uncertain, with many projects still in experimental phases. For Elastic, they represent more of a beacon of hope than immediate revenue generators.
Previously, two main factors influenced my decision to sell my Elastic position in late 2023. Firstly, a complete leadership overhaul occurred, with founder Shay Banon stepping down and Ash Kulkarni stepping up as CEO. I was skeptical about the new Chief Revenue Officer, Mark Dodds, who had transitioned from Cisco, fearing a potential culture clash between Elastic’s open-source legacy and the traditional enterprise sales approach.
However, it appears my initial concerns were misplaced. Elastic has made significant strides in its sales and marketing efficiency, outperforming its strategies from two years ago.
Ultimately, my decision to sell was primarily driven by the valuation of Elastic’s stock. Like many software companies, Elastic rushed to align itself with the generative AI trend, resulting in a temporary 100% surge in stock price to around $115, largely speculative in nature. The EV/Sales ratio had soared to 9, with a cash flow multiple exceeding 70—ambitious figures for a company growing less than 20% annually while still incurring substantial losses.
In a more detailed write-up on my English-language Substack (behind a paywall), I explore my renewed interest in investing in Elastic after a two-year break.