Between 2019 and 2023, I held a significant position in Elastic stock, which consistently contributed to my investment portfolio. However, after achieving modest gains, I made the decision to divest my shares. Now, after a two-year hiatus, I find myself reevaluating this B2B software provider, known as the ‚Search AI Company.‘
Originally from the Netherlands, Elastic established itself as a leading European software firm long before its IPO in the United States in 2018.
My own encounters with its technology predated this move, and I have always regarded Elastic as a standout in the crowded field of software companies. It has garnered a reputation as a global leader, with over half of the Fortune 500 corporations relying on its solutions.
Index du contenu:
Elastic’s market presence and stock performance
Despite its robust offerings, Elastic’s stock has often gone unnoticed by many investors. Even seven years post-IPO, it still falls into the category of the so-called ‚fallen angels.‘ This situation primarily arises from the company’s inability to recover from the tech crash of 2022, with its stock price remaining over 50% below the highs it reached in 2021.
Sometimes, the greatest opportunities lie in familiar territory. Thus, it is time to take a closer look at Elastic once more.
Understanding Elastic’s technology and evolution
The foundation of enterprise search
For those unfamiliar with Elastic, here’s a brief overview: well before its IPO, the company was the premier provider of enterprise search solutions. This technology is crucial for efficiently accessing specific data within organizations, distinguishing it from general search engines like Google.
Many of us have unknowingly utilized Elastic’s technology through various applications. For instance, the Uber app leverages Elastic to locate nearby vehicles, while Tinder uses it to match users with potential partners. Additionally, cybersecurity firms employ Elastic’s solutions to detect threats, demonstrating its versatility in handling large datasets within milliseconds.
Product development and market expansion
Elasticsearch, the scalable real-time search engine developed by Elastic, supports a wide range of data types, including both structured and unstructured formats. Building upon this foundational technology, Elastic has introduced various products catering to key market needs.
In 2019, Elastic formally entered the security market, transitioning from being a component supplier to offering full-fledged SIEM (Security Information and Event Management) solutions. This strategic shift came after numerous clients had already started using Elastic’s products for cybersecurity tasks like threat detection and analysis.
Moreover, since 2020, Elastic has also ventured into the realm of observability, a key component in monitoring distributed systems. This has positioned Elastic as a direct competitor to the then-dominant player, Splunk, which was acquired by Cisco in 2024.
As of 2023, Elastic has increasingly focused on new 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.
Challenges and opportunities in the AI landscape
Elastic’s product marketing underscores the significance of its technology in supporting various generative AI initiatives launched by numerous organizations. It is reasonable to believe that Elastic’s advanced search capabilities will play a pivotal role in enriching large language models (LLMs) with insights derived from proprietary datasets, making them searchable in an instant.
However, the success of these AI initiatives remains uncertain, as many projects are still in their experimental phases and currently represent more of a hopeful vision than a reliable revenue stream for Elastic.
In the past, I had two primary concerns regarding my investment in Elastic. Firstly, a leadership change occurred in 2022/2023, with founder Shay Banon stepping down and Ash Kulkarni taking over as CEO. My initial skepticism led me to sell my shares in, as I questioned the suitability of the new Chief Revenue Officer, Mark Dodds, who transitioned from Cisco. I feared that his corporate background might clash with Elastic’s open-source roots.
In retrospect, I underestimated Elastic’s ability to adapt. Today, the company has significantly improved its sales and marketing strategies, operating more efficiently than it did two years ago.
My decision to exit was also influenced by the prevailing stock valuation. Like many software firms, Elastic rushed to capitalize on the generative AI trend in 2023, resulting in a temporary price surge of 100% to approximately $115—a rise that appeared largely speculative.
At that time, the company’s EV/Sales ratio had doubled to 9, with a cash flow multiple exceeding 70. Such valuations were exceedingly ambitious for a company growing at less than 20% annually while still reporting substantial losses.
In a more detailed piece on my English-language Substack (behind a paywall), I delve into the reasons for my renewed interest in Elastic stocks after a two-year break.
