Between 2019 and 2023, Elastic stocks played a significant role in my investment portfolio. After achieving modest gains, I decided to exit my position. However, after a two-year hiatus, I am now reevaluating the merits of reinvesting in this B2B infrastructure software provider, which has since branded itself as ‚the Search AI Company.‘
Originating from the Netherlands, Elastic was already a leading name in European software before its IPO in the United States in 2018.
My own encounters with Elastic date back even further, as it has consistently stood out among its European peers, establishing itself as a global contender in the software arena. Notably, over 50% of the Fortune 500 companies are on Elastic’s client roster.
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The trajectory of Elastic’s stock performance
For those unfamiliar with the company, here’s a brief overview: Elastic has long been recognized as a top provider of Enterprise Search. This technology is not about competing with Google; instead, it focuses on enabling efficient access to specific data within organizations.
Many of us have unknowingly utilized Elastic’s technology for years. Whether we’re summoning rides through the Uber app, swiping through potential matches on Tinder, or employing cybersecurity services to detect threats, the Elasticsearch engine has been pivotal in sifting through vast datasets at lightning speed.
Elasticsearch is an exceptionally scalable, real-time search engine capable of managing diverse data types, including both structured and unstructured data. Building on this foundational technology, Elastic has developed various products aimed at crucial use cases over the years.
Diversification into security and observability
In 2019, Elastic officially ventured into the security market. Although some clients had already been using Elastic’s products for threat detection and analysis, this marked a transition from being a component supplier to providing comprehensive Security Information and Event Management (SIEM) solutions.
Furthermore, since 2020, Elastic has expanded its offerings into the observability domain. This represents an evolution of traditional monitoring systems, catering to the needs of distributed systems and positioning Elastic as a direct competitor to the then-leading market player, Splunk.
Elastic’s strategic pivot towards generative AI
As of 2023, Elastic has sharpened its focus on emerging use cases related to generative AI. The company has significantly enhanced its platform to prioritize vector search, a key technology for semantic and AI-driven search applications.
The marketing strategy of Elastic emphasizes the crucial role of its technology in facilitating generative AI initiatives that numerous organizations are undertaking. It is plausible that Elastic’s leading search technology will play a vital role in enriching large language models (LLMs) with knowledge derived from proprietary datasets, making them searchable in mere milliseconds.
Recent advancements and potential challenges
The recent launch of the Elastic Native Inference Service, a GPU-accelerated inference-as-a-service solution within Elastic Cloud, further positions Elastic as an AI infrastructure company rather than merely a search engine.
However, the long-term success of these AI applications remains uncertain. Many of these projects are still in exploratory phases and currently represent more of a hope than a revenue generator for Elastic.
Reflecting on my earlier investment decisions, two primary factors influenced my exit in late 2023. The first was a complete management overhaul: founder Shay Banon stepped down, and Ash Kulkarni was appointed as the new CEO. I sold my stake in Elastic, concerned about the incoming Chief Revenue Officer, Mark Dodds, who transitioned from a lengthy career at Cisco. The potential cultural clash between the company’s open-source roots and Dodds‘ enterprise sales approach seemed significant.
In hindsight, that assessment was misguided. Elastic has since improved its sales and marketing strategies, operating with greater efficiency compared to two years ago.
The second reason for my exit was the valuation of Elastic’s stock at the time. Like many software companies, Elastic quickly aligned itself with the generative AI trend, resulting in a 100% stock price surge to approximately $115, driven largely by speculation.
At that point, the EV/Sales ratio had surged to 9, with a cash flow multiple exceeding 70. Such a valuation was excessively ambitious for a company growing at less than 20% annually and still facing significant losses.
In a more detailed discussion on my English-language Substack (behind a paywall), I outline the reasons prompting my renewed interest in Elastic shares after a two-year pause.
Disclaimer: The author and/or affiliated individuals or entities hold shares in Elastic. This piece reflects a personal opinion and should not be construed as investment advice. Please be aware of the legal disclaimers.
