From 2019 to 2023, my investment portfolio included shares in Elastic, a company that has shown remarkable resilience in the face of market fluctuations. After experiencing moderate gains, I opted to divest, and the reasoning behind that decision is detailed further on.
Now, following a two-year hiatus, I’ve decided to reinvest in this B2B infrastructure software firm, which has successfully branded itself as ‚the Search AI Company.‘
Originating from the Netherlands, Elastic established itself as a leader in the European software sector even before its IPO in the United States in 2018. My initial encounter with their technology occurred during my own software development endeavors long before this pivotal moment.
Understanding Elastic’s Market Position
For those unfamiliar, Elastic distinguishes itself from other European software providers by maintaining a strong global presence and leadership role. Notably, over half of the Fortune 500 companies count Elastic among their clientele. However, despite this impressive roster, Elastic’s stock often remains overlooked by many investors. Even seven years post-IPO, it has fallen into the category of ‚fallen angels‘ due to its inability to recover from the tech downturn of 2022, with prices still over 50% lower than their 2021 peaks.
The Hidden Opportunities
Sometimes, the best investment opportunities are those with which we are already familiar. Thus, it’s time to closely examine Elastic once more. Long before its public listing, the company was recognized as a premier provider of enterprise search solutions. Elastic’s technology enables businesses to efficiently search and access specific data, setting it apart from traditional search engines like Google.
Many of us have unknowingly benefitted from Elastic’s innovations for years. Applications like Uber rely on its technology to locate nearby vehicles, while Tinder uses it to match users. Even cybersecurity solutions utilize Elasticsearch to detect threats swiftly. This powerful, scalable real-time search engine effectively handles vast datasets, whether structured or unstructured.
Product Development and Market Evolution
Building upon its core search technology, Elastic has rolled out various products tailored to critical use cases in recent years. A significant advantage for customers is Elastic’s ability to provide multiple solutions on a single software stack, which results in synergistic benefits and potential vendor consolidation.
In 2019, Elastic officially entered the security market. Although customers had been utilizing Elastic solutions for detecting and analyzing cyber threats prior to this, the company formalized this offering into a dedicated product line, transitioning from a component provider to a Security Information and Event Management (SIEM) solution provider.
Shifting Focus to Observability and AI Integration
In 2020, Elastic expanded its focus to encompass observability, a sophisticated evolution of previous monitoring systems designed for distributed environments. This strategic move positioned Elastic as a direct competitor to the then-market leader, Splunk, which was acquired by Cisco in 2024.
As of 2023, Elastic is increasingly aligning itself with new applications related to generative AI. The company has enhanced its platform with features focused on vector search, a crucial technology for semantic and AI-driven search applications. Elastic’s product marketing emphasizes the significance of its technology in facilitating generative AI projects that numerous companies are launching.
Challenges and Future Outlook
While the potential for success in these AI applications is promising, it remains largely speculative at this stage. Most of these initiatives are still in experimental phases and represent more of a hope for future revenue than a current income source.
During my previous investment, two main factors influenced my decision to divest. A complete leadership overhaul occurred in 2022/2023 when founder Shay Banon stepped down, and Ash Kulkarni was appointed as CEO. My concerns about the new Chief Revenue Officer, Mark Dodds—who transitioned from a lengthy corporate career at Cisco—led to my belief that there might be a cultural clash between the legacy of this open-source company and the enterprise-focused sales strategy.
In retrospect, I underestimated Elastic’s adaptability. Today, the company has greatly improved its sales and marketing operations, functioning more efficiently than two years ago. The primary reason for my earlier exit, however, was the valuation of Elastic stock, which, like many software companies, surged as it pivoted towards generative AI, causing a 100% price increase to around $115, driven primarily by speculative expectations.
At that point, the EV/Sales ratio had soared to 9, while the cash flow multiple exceeded 70. This situation created an unsustainable valuation for a company growing at less than 20% annually and still facing significant losses. In a more detailed analysis on my English-language Substack (behind a paywall), I elaborate on my renewed investment in Elastic after a two-year hiatus.
Disclaimer: The author and/or associated entities may hold shares in Elastic. This article reflects personal opinions and should not be considered investment advice. Please refer to legal disclaimers.