From 2019 to 2023, Elastic stocks were a mainstay in my investment portfolio. After enjoying modest gains, I made the decision to sell my shares, a choice driven by various factors I have outlined elsewhere. Now, after a two-year hiatus, I find myself drawn back to this B2B infrastructure software provider, which has rebranded itself as ‚the Search AI Company.‘
Originally founded in the Netherlands, Elastic established itself as a leader in the European software landscape well before its 2018 IPO in the United States.
My journey with Elastic began long before its public listing, as I encountered its technology in various personal software projects.
Understanding Elastic’s Market Position
For many investors, Elastic remains an overlooked asset, often categorized among the so-called ‚fallen angels.‘ Despite its strong fundamentals, the company’s stock has struggled to recover from the tech downturn of 2022, currently trading over 50% below its all-time highs from 2021.
Nonetheless, familiarity can often unveil hidden opportunities. It’s time to reassess Elastic and its potential in today’s market.
A glance at Elastic’s performance
Longtime followers of my writings may already be aware of Elastic’s offerings. For those unfamiliar, the company specializes in enterprise search, focusing on efficient data retrieval within organizations rather than competing with general search engines like Google.
Many of us have unknowingly utilized Elastic’s technology, whether through the Uber app that locates nearby vehicles, the Tinder app that connects people, or through cybersecurity services that detect threats. The power of Elasticsearch lies in its ability to search massive datasets in milliseconds, making it invaluable across various applications.
Elasticsearch serves as a highly scalable real-time search engine capable of handling both structured and unstructured data.
Product Innovations and Strategic Directions
In recent years, Elastic has diversified its product line, building on its core search technology. One significant development occurred in 2019 when the company officially entered the security market. Until then, several clients had already been using Elastic’s solutions for threat detection and analysis. This move allowed Elastic to transition from a component supplier to a comprehensive provider of Security Information and Event Management (SIEM) solutions.
Elastic’s expansion continued in 2020 as the company ventured into the realm of observability, evolving its monitoring systems to suit the complexities of distributed architectures. This strategy positioned Elastic as a direct competitor to Splunk, the then-market leader, which was acquired by Cisco in 2024.
Adapting to the AI Landscape
As of 2023, Elastic has increasingly focused on emerging applications related to generative AI. The company has enhanced its platform with a focus on vector search, a critical technology for semantic and AI-driven search applications. Elastic’s marketing emphasizes the role of its technology in supporting generative AI initiatives, which have gained traction among numerous enterprises.
Indeed, the market-leading search technology of Elastic is poised to play a vital role in enriching large language models (LLMs) with knowledge derived from proprietary datasets, enabling rapid search capabilities.
Recently, Elastic announced the ‚Elastic Native Inference Service,‘ a GPU-accelerated Inference-as-a-Service offering within Elastic Cloud, further solidifying its identity as an AI infrastructure firm rather than merely a search engine.
Evaluating Recent Changes and Future Prospects
However, the sustainable success of these AI-related initiatives remains uncertain, as many of these projects are still in experimental phases and primarily represent aspirations rather than immediate revenue streams.
Two key factors influenced my decision to divest my Elastic shares in 2023. First, the company underwent a complete leadership overhaul, with founder Shay Banon stepping down and Ash Kulkarni taking the helm as CEO. I sold my position out of skepticism regarding the new Chief Revenue Officer, Mark Dodds, who transitioned from a lengthy career at Cisco. I perceived a potential ‚culture clash‘ between the company’s open-source heritage and the enterprise sales strategies he brought.
In hindsight, my concerns were misplaced. Elastic has significantly improved its sales and marketing effectiveness since that time, demonstrating a more efficient operation compared to two years ago.
Ultimately, my primary reason for exiting was the valuation of Elastic’s stock. Like many software companies, Elastic hastily aligned itself with generative AI trends, resulting in a temporary stock surge of 100%, reaching approximately $115, primarily based on speculative enthusiasm. The EV/Sales ratio soared to 9, while cash flow multiples exceeded 70, reflecting an excessively ambitious valuation for a company growing at under 20% annually and still reporting significant losses.
In a more detailed analysis on my English-language Substack (behind a paywall), I delve into the rationale behind my renewed investment in Elastic after a two-year abstention.