Elastic's Q3 Revenue Growth Meets Thresholds, But Key Metrics Remain Unclear

What happened

Elastic reported Q3 FY2026 revenue of $450 million, up 18% year-over-year, with subscription revenue increasing 19%, aligning with the DeepValue report's criterion for avoiding a downgrade if Elastic Cloud growth stays above 18% YoY. This performance suggests resilience amid concerns over decelerating cloud trends, potentially driven by AI workloads like Search AI Lake and Agent Builder. However, the press release omits critical details such as Elastic Cloud-specific growth and net expansion rate (NRR), which are essential for evaluating the AI-driven re-acceleration thesis. High stock-based compensation and competitive pressures from Datadog and Splunk, as highlighted in the report, persist as underlying risks that could erode profitability. Investors should view these results as a positive step but await comprehensive metrics to confirm sustainable growth and Rule-of-40 progress.

Implication

The 18% YoY revenue growth in Q3 FY2026 aligns with the DeepValue report's base scenario, reducing immediate downgrade risks and reinforcing Elastic's position as a mid-teens growth compounder. However, without disclosed Elastic Cloud growth or NRR figures, it's unclear if AI initiatives are driving meaningful upsell or if growth is merely in line with historical trends. If Elastic Cloud growth is confirmed above 18%, it could indicate stabilization, but reaching the 22% threshold for an upgraded thesis requires stronger evidence of AI adoption. Investors must monitor Q4 results for NRR data and cloud-specific metrics to assess competitive durability against peers like Datadog and Splunk. Ultimately, this quarter supports cautious optimism, but the investment case hinges on future execution and margin discipline amid high SBC and market volatility.

Thesis delta

The Q3 revenue growth of 18% YoY supports the DeepValue thesis that Elastic can avoid the bear case by maintaining growth above 18%, but it does not yet trigger an upgrade due to missing data on Elastic Cloud and NRR. The thesis remains a 'POTENTIAL BUY' with unchanged conviction, emphasizing the need for Q4 results to confirm whether AI workloads can sustain or accelerate growth towards the 20% Rule-of-40 target.