By ALEX KAGIN, Director of Technology Investing Research, Money Morning • @alexkagin • July 30, 2020
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Dear Red Alert Reader,
Can you imagine life without search?
Before the Internet you had to go to an encyclopedia, visit a library, or phone a friend and not even be sure if you got the right answer. Nothing was instantaneous.
The ability to give people the exact info they're looking for on command is why Google's parent company Alphabet Inc. (NASDAQ: GOOGL) has turned into a $1 trillion mammoth.
While Google has been a monster success, another company is staking its claim to the future of search.
You see, the idea of having data at your fingertips is much older than the Internet, and it's not stopping there either…
Paul Otlet, a visionary thinker, conceived of a "mechanized searchable storage systems of books and media" in the 1930s. He created a system of index cards stored in custom cabinets and indexed according to the Universal Decimal Classification. He used this system to create The Mundaneum, which eventually contained 100,000 files and millions of images.
In 1945 Vannevar Bush described a hypothetical machine called the Memex, a device that stored information on microfilm and let users search documents through "associative trails." But still, the idea of search was in its infancy.
That is until the World Wide Web was created in 1989. Hundreds of websites were launched with data at your fingertips. But the same problem emerged: how to find the information you needed. That all changed within the first few years of the Internet as we got the first search engines like Yahoo (NYSE: VZ) and WebCrawler.
Today there are roughly 2 billion websites, and it is estimated that Google processes approximately 70,000 search queries every second, or 5.8 billion a day.
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That's a lot – but it's also not all about Google. Instead of looking up web pages, just imagine everywhere else that data lives and how important it is to find it. Searching your cloud storage folder, looking for that favorite recipe on a website, grabbing the closest Uber or Lyft, or even searching for a good movie on Netflix. On the enterprise side, large corporations need to search through patents, look at engine log data when building cars, and even security logs to protect corporate data.
The search opportunities are endless.
We live in a time where data is exploding. It is estimated that 90% of the world's data was created in the last two years alone. This means that making sense and using this data has become a huge opportunity.
And one company is making this all possible. It's not Google, either. In fact, it's one of my favorite new tech stocks right now.
The Fast-Moving Tech Stock Taking on Search
Elastic N.V. (NYSE: ESTC) was founded in 2012 as a search company that builds self-managed and SaaS offerings for search, logging, security, and analytics use cases. The company develops the open source Elastic Stack, which includes Elasticsearch, Kibana, Beats, and Logstash.
Elastic search technology is used by eBay Inc. (NASDAQ: EBAY), Wikipedia, Yelp Inc. (NYSE: YELP), Uber Technologies Inc. (NYSE: UBER), Lyft Inc. (NASDAQ: LYFT), Tinder (NASDAQ: MTCH), Netflix Inc. (NASDAQ: NFLX), and thousands of other companies with widespread use cases.
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Uber and Lyft use search to match locations and drivers, and Walmart Inc. (NYSE: WMT) uses it for real-time analytics. Just imagine, Walmart sells over 150 bananas a second. With Elastic it can track and analyze billions in sales at once. Bayer AG (OTCMKTS: BAYRY), a multinational pharmaceutical and life sciences company, uses Elastic to run searches on patent data.
The opportunities could go on forever. That's why Elastic has been growing so fast, with 53% revenue growth last quarter. It now has 11,300 subscriptions and over 600 customers with annual contract value of more than $100,000.
Elastic has built itself on a free and open foundation. This has helped it build up a large customer base, which it is using to convert to paying customers. While this can be a challenging strategy, companies like Red Hat, which was acquired by IBM Corp. (NYSE: IBM) for $34 billion, show it is possible. With an in-need product, people will pay.
While Elastic had started with just search, it has expanded into new markets such as observability, where it can provide solutions for enterprises to log, analyze, and observe events. This is just one example of how it can expand its user base.
Even with Elastic guiding for 25% growth for its next full year, significantly lower than its current growth rate, the uncertain macro environment is mostly to blame. There is still significant interest in the platform from developers and large corporations, and this is why I am thinking about this company as a long-term play. Data will continue to grow, and the need for search will become more and more important.
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