Elastic (ESTC)

Search AI platform provider Elastic (NYSE:ESTC) reported Q4 CY2025 results beating Wall Street’s revenue expectations, with sales up 17.7% year on year to $449.9 million. Guidance for next quarter’s revenue was better than expected at $446 million at the midpoint, 0.8% above analysts’ estimates. Its non-GAAP profit of $0.73 per share was 13% above analysts’ consensus estimates.

Company Overview

Built on the powerful open-source Elasticsearch technology that powers search functionality for thousands of websites worldwide, Elastic (NYSE:ESTC) provides a search and AI platform that helps organizations find insights from their data, monitor applications, and protect against security threats.

Generating insights from system level data is an increasing priority for most businesses, but to do so requires connecting and analyzing piles of data stored and siloed in separate databases. This is the demand driver for cloud based data infrastructure software providers, who can more readily integrate, distribute and process information vs. legacy on-premise software providers.

Elastic competes with various companies across its solution areas, including Splunk (owned by Cisco Systems), Datadog (NASDAQ:DDOG), and Dynatrace (NYSE:DT) in observability; CrowdStrike (NASDAQ:CRWD) and Microsoft's Azure Sentinel (NASDAQ:MSFT) in security; and Algolia, Lucidworks, and Google (NASDAQ:GOOGL) in search applications.

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Elastic grew its sales at a solid 24.8% compounded annual growth rate. Its growth beat the average software company and shows its offerings resonate with customers.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Elastic’s annualized revenue growth of 17.6% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Elastic reported year-on-year revenue growth of 17.7%, and its $449.9 million of revenue exceeded Wall Street’s estimates by 2.6%. Company management is currently guiding for a 14.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 12.6% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates its products and services will face some demand challenges.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Elastic’s billings came in at $520.8 million in Q4, and over the last four quarters, its growth was underwhelming as it averaged 12.5% year-on-year increases. This alternate topline metric grew slower than total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for Elastic to acquire new customers as its CAC payback period checked in at 57.2 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Elastic’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 112% in Q4. This means Elastic would’ve grown its revenue by 12% even if it didn’t win any new customers over the last 12 months.

Elastic has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.

For software companies like Elastic, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Elastic’s gross margin is good for a software business and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 76.1% gross margin over the last year. That means for every $100 in revenue, roughly $76.05 was left to spend on selling, marketing, and R&D.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Elastic has seen gross margins improve by 2 percentage points over the last 2 year, which is solid in the software space.

Elastic produced a 76.3% gross profit margin in Q4, up 1.7 percentage points year on year. Elastic’s full-year margin has also been trending up over the past 12 months, increasing by 1.8 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Although Elastic broke even this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 1.7% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Elastic reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

Over the last two years, Elastic’s expanding sales gave it operating leverage as its margin rose by 4.5 percentage points. Still, it will take much more for the company to reach long-term profitability.

This quarter, Elastic’s breakeven margin was 0.1%, up 1.3 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Elastic has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 16% over the last year, slightly better than the broader software sector.

Elastic’s free cash flow clocked in at $53.66 million in Q4, equivalent to a 11.9% margin. The company’s cash profitability regressed as it was 10.9 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict Elastic’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 16% for the last 12 months will increase to 19.8%, giving it more flexibility for investments, share buybacks, and dividends.

It was great to see Elastic’s full-year EPS guidance top analysts’ expectations. We were also happy its revenue outperformed Wall Street’s estimates. Overall, this print had some key positives. Investors were likely hoping for more, and shares traded down 7.6% to $56.88 immediately following the results.

Updated: February 26, 2026 at 4:56 PM EST

Before making an investment decision, investors should account for Elastic’s business fundamentals and valuation in addition to what happened in the latest quarter.

Elastic isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was strong over the last five years, it’s expected to deteriorate over the next 12 months and its expanding operating margin shows it’s becoming more efficient at building and selling its software. And while the company’s gross margin suggests it can generate sustainable profits, the downside is its operating margins are low compared to other software companies.

Elastic’s price-to-sales ratio based on the next 12 months is 3.5x. This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $95.04 on the company (compared to the current share price of $56.88).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.