From 2019 to 2023, Elastic stocks were a core component of my investment portfolio. However, after realizing modest gains, I made the decision to divest, with the reasoning detailed in previous discussions. Now, following a two-year hiatus, I’ve chosen to re-enter the market with a fresh position in this B2B infrastructure software provider, which has now branded itself as ‚the Search AI Company.‘
Originally hailing from the Netherlands, Elastic was already a frontrunner in the European software arena before its 2018 IPO in the United States.
I had encountered its innovative solutions long before this milestone within my own software projects.
The evolution of Elastic’s offerings
For those unfamiliar, Elastic stands out among its European counterparts, consistently demonstrating a robust global presence. More than half of the Fortune 500 companies are now part of Elastic’s impressive clientele. Despite its accomplishments, many investors overlook Elastic, and even after seven years post-IPO, the company remains in the shadows, often categorized as a ‚fallen angel‘. This status is largely attributed to its stock price, which has not fully recovered from the tech crash of 2022, trading over 50% below its peak in 2021.
Understanding Elastic’s technology
Long before going public, Elastic was recognized as the leading provider of enterprise search. This technology is crucial for efficiently searching and accessing specific data within organizations, rather than serving as an alternative to general internet searches like Google.
Many of us have unknowingly utilized Elastic’s technology over the years. For instance, the Uber app leverages Elastic to locate nearby vehicles, while Tinder relies on it to match users with compatible partners. Moreover, various cybersecurity services utilize Elastic’s solutions to detect threats, showcasing its capability to manage extensive datasets in mere milliseconds.
Central to this is Elasticsearch, a highly scalable real-time search engine that accommodates various data types, both structured and unstructured. Over recent years, Elastic has expanded its product suite, developing tailored solutions for critical use cases based on this foundational technology.
New directions in Elastic’s strategy
In 2019, Elastic officially ventured into the security market. Prior to this, several customers had already employed Elastic products for threat detection and analysis. At this juncture, Elastic transitioned from being a components supplier to delivering comprehensive SIEM solutions (Security Information and Event Management).
Elastic’s focus on observability and AI
By 2020, Elastic began to carve out a niche in the realm of observability, representing an evolution of earlier monitoring systems designed for distributed environments. This move positioned Elastic as a competitor to the then-dominant player, Splunk, which was acquired by Cisco in 2024.
As of 2023, Elastic is increasingly concentrating on new applications linked to generative AI. The company’s platform has been enhanced with a focus on vector search, a vital technology for semantic and AI-powered search applications. Elastic’s marketing emphasizes the significance of its technology in facilitating generative AI projects, which have been launched by numerous organizations.
Indeed, it appears plausible that Elastic’s leading search technology will play a crucial role in enriching large language models (LLMs) with insights drawn from proprietary datasets, rendering them searchable in seconds.
Recently, Elastic announced the ‚Elastic Native Inference Service‘, a GPU-accelerated inference-as-a-service within Elastic Cloud, further establishing its position as an AI infrastructure provider rather than merely a search engine.
However, the sustainable success of these AI initiatives remains uncertain, as they largely exist in an experimental phase, with revenue generation still a distant goal.
Reflections on past decisions and future prospects
In 2022 and 2023, I experienced a significant leadership shift within Elastic. The founder, Shay Banon, stepped back, and Ash Kulkarni ascended to the role of CEO. In, I divested my Elastic holdings as I harbored doubts about the new Chief Revenue Officer, Mark Dodds, who had transitioned from a long corporate career at Cisco. I perceived a potential cultural clash between the former open-source ethos of Elastic and the new enterprise-focused sales strategy.
It turns out my assessment may have been premature. Today, Elastic’s sales and marketing operations are significantly more effective and well-aligned than they were two years ago.
My primary reason for exiting back then was, unsurprisingly, the valuation of Elastic’s shares. Like many software firms, Elastic hastily embraced the generative AI trend, resulting in a remarkable 100% stock price surge to around $115, which was primarily speculative in nature.
At that time, the EV/Sales ratio had surged to 9, with a cash flow multiple exceeding 70—an exceptionally lofty price for a company growing at less than 20% annually, still reporting substantial losses.
In an upcoming detailed post on my English Substack (paywalled), I will elaborate on why I am re-investing in Elastic after a two-year break.