What happened

Shares of Elastic (NYSE:ESTC) soared 23.3% in June, according to data provided by S&P Global Market Intelligence. The software company saw its share price rise due to a strong fourth quarter earnings report and enjoyed the tailwinds of a broad recovery in growth stocks.

Two people sitting at a desk looking at a computer.

Image source: Getty Images.

So what

For the quarter ending April 30, Elastic generated $177.6 million in revenue, which was a huge beat from its own guidance of $158 million to $159 million. It also beat the consensus analyst expectation for $157.9 million in revenue. In fiscal year 2021, which ended on April 30 for Elastic, revenue was $608.5 million, up 42% year over year. Elastic's software-as-a-service (SaaS) segment is growing like a weed. Revenue for the segment was $166.3 million last year, growing at a rapid 80% year over year. 

Going deeper into the financials, Elastic generated $18.3 million in free cash flow last year, giving it a 3% free cash flow margin. In fiscal year 2022, management guided for $782 million to $788 million in revenue and expects to hit $1 billion in revenue the year after. These strong growth expectations combined with positive free cash flow likely have investors excited about investing in Elastic stock.

Elastic has three core software products that it sells to other enterprises: search, observability, and security. Software engineers and data scientists at companies like Adobe (NASDAQ:ADBE) and T-Mobile (NASDAQ:TMUS) use Elastic to search and organize huge datasets, improving efficiency on the backend and hopefully finding ways to improve the customer experience. With 64.2 zettabytes (one zettabyte equals a trillion gigabytes) of data generated worldwide in 2020 that is projected to grow at a 19% rate through 2025, there's no wonder more and more companies are using Elastic products.

Now what

Elastic is growing quickly and should be able to ride an industry tailwind for years to come. With a market cap of $13.42 billion, the stock currently trades at a price-to-sales ratio (P/S) of 22, making it expensive relative to most other companies. However, if you believe Elastic can get to $1 billion in sales by 2023 and increase its profit margins, this high valuation should come down rather quickly. After the 23.3% run-up in June, it might not be time to go all-in on Elastic stock, but if you're a longtime shareholder, there's no reason to sell here if you believe in this company's potential.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.