From 2019 to 2023, Elastic stocks formed a cornerstone in my investment portfolio. After achieving modest returns, I made the decision to exit, and the rationale for that move can be found in earlier writings. Now, following a two-year hiatus, I am excited to reestablish a position in this B2B infrastructure software provider, which has rebranded itself as ‚the Search AI Company‘.
Originally based in the Netherlands, Elastic had already cemented its status as a premier European software entity prior to its 2018 IPO in the United States.
My own encounters with Elastic date back to my previous software projects, where I recognized its potential long before it became a public company.
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Understanding Elastic’s Unique Positioning
Elastic stands out among its European counterparts, not just for its innovative technology but also for its global reach and sustainable leadership. The company boasts an impressive clientele, with over 50% of the Fortune 500 companies utilizing its services. However, despite its substantial achievements, Elastic’s stocks tend to fly under the radar for many investors, still categorized as ‚fallen angels‘ even seven years post-IPO.
The primary reason for this perception lies in its stock performance, which has yet to recover from the tech crash of 2022, remaining over 50% below its 2021 highs. Yet, sometimes the most promising opportunities are those we are already familiar with, making it pertinent to delve deeper into Elastic’s offerings once again.
Elastic’s Technological Innovations
For those unfamiliar with Elastic, it has long been recognized as a frontrunner in enterprise search solutions. This technology allows for efficient data retrieval within organizations, distinguishing it from conventional search engines like Google.
Many of us have unknowingly benefited from Elastic’s technology for years. Applications such as the Uber app, which locates nearby vehicles, the Tinder app for partner matching, and various cybersecurity services that detect threats, all leverage Elasticsearch to rapidly sift through vast data sets in mere milliseconds.
Elasticsearch functions as a highly scalable, real-time search engine capable of processing diverse data types, both structured and unstructured. Over the years, Elastic has expanded its product line to address critical use cases, allowing customers to consolidate their software needs onto a single stack, resulting in enhanced synergies.
Recent Developments and Market Positioning
In 2019, Elastic made a significant entry into the security market. Although clients had previously utilized Elastic products for threat detection and analysis, the company formalized this offering into a dedicated product line, transforming from a component supplier to a provider of SIEM (Security Information and Event Management) solutions.
Continuing its trajectory, Elastic diversified into the realm of observability in 2020, a critical evolution of monitoring systems suited for distributed environments. This move positioned Elastic as a competitor against the then-market leader, Splunk, which was acquired by Cisco in 2024.
Harnessing the Power of AI
As of 2023, Elastic is increasingly aligning itself with the burgeoning field of generative AI. The company has advanced its platform to focus on vector search, a pivotal technology for semantic and AI-driven applications.
Elastic’s marketing emphasizes the crucial role its technology will play in executing generative AI projects initiated by numerous enterprises. Given the capabilities of Elastic’s leading search technology, it is reasonable to predict that it will significantly enhance large language models (LLMs) by integrating proprietary datasets and ensuring they are searchable in milliseconds.
The recent introduction of the Elastic Native Inference Service, a GPU-accelerated inference-as-a-service in Elastic Cloud, further positions the company as a key player in the AI infrastructure space, transcending its initial identity as simply a search engine.
However, the long-term success of these AI applications remains uncertain, as many projects are still in exploratory phases and are more aspirational than revenue-generating at this stage. There were two primary reasons for my past exit from Elastic, which I discuss in detail elsewhere.
A significant leadership transition occurred in 2022/2023, with founder Shay Banon stepping down and Ash Kulkarni taking over as CEO. In, I divested my Elastic shares, concerned about the fit of the new Chief Revenue Officer, Mark Dodds, who came from a corporate background at Cisco. The potential cultural clash between the original open-source ethos and the enterprise sales strategy seemed daunting to me.
In hindsight, I may have misjudged the situation. Today, Elastic’s sales and marketing efforts are more refined and operate with greater efficiency than they did two years ago.
The principal factor that prompted my exit at that time, however, was the valuation of Elastic’s stock. Like many other software companies, Elastic rushed to capitalize on the generative AI trend, resulting in a temporary surge of nearly 100% to approximately $115 per share, driven largely by speculation.
At that time, the EV/sales ratio had surged to 9, coupled with a cash flow multiple exceeding 70, representing an exceptionally ambitious valuation for an entity growing at less than 20% annually and grappling with substantial losses.
For a deeper exploration of my renewed interest in Elastic stocks after a two-year gap, please refer to my detailed analysis on my English-language Substack (paywall).Disclaimer: The author and/or affiliated parties hold shares in Elastic. This article reflects a personal opinion and does not constitute investment advice. Please review the legal disclaimers.
