Why Did Elsight (ASX:ELS) Fall 15% despite 11x revenue growth?

So what happened with Elsight?

This is a company that just delivered a very strong earnings result and, importantly, its first full calendar year of profitability. Yet the stock still fell about 15%. When you see that kind of disconnect, it usually tells you the issue is not the result, it is the price.

Elsight has been trading around a A$1 billion market cap, and it is possible the share price had simply moved too far ahead of the fundamentals. In that scenario, even good news is not enough, because expectations are already stretched and the market starts pulling the valuation back toward something more realistic.

We have seen a similar dynamic play out in DroneShield this week. After a sharp run, the stock dropped around 30% as the market cooled on the defence trade. It does not mean the long term tailwind disappears, but it does suggest the hype cycle has eased for now.

The way we see it, defence sentiment moves in waves. The theme will likely return, but timing and valuation still matter.

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Elsight Hits Escape Velocity: 77% Gross Margin And Cash Flow Positive

Elsight reported A$14.4 million in revenue, marking its fourth consecutive quarter of revenue growth. That momentum appears to be supported by defence contract backlog, with deliveries scheduled into early 2026.

On a cumulative basis, revenue reached roughly A$35 million, which management described as an 11x increase versus FY24. The key point for investors is not just the growth rate, but the quality of the revenue mix that is starting to emerge.

Management stated gross margins were as high as 77%, which is consistent with a business that is increasingly driven by software and services. Recurring revenue from software licences and cloud services reached US$2.6 million, representing about 12% of revenue, and grew 253% year on year. That is the type of revenue that can support sustained margin expansion if it continues to scale.

Operationally, the story looks like two growth engines working together. First, a meaningful step up in hardware and program deliveries, including a strong Q4 and contracted shipments scheduled for early 2026. Second, a growing base of higher margin recurring revenue that can build stability over time.

Order backlog also expanded to around US$22 million, or A$32.13 million, during the quarter. That backlog gives improved visibility into revenue delivery through CY2026, which is often what the market wants most during a scale up phase.

What I found particularly encouraging is that Elsight turned cash flow positive. Net cash from operating activities was about US$8 million for the quarter and US$19 million for the full year. For a company still scaling rapidly, it stands out to see positive operating cash flow alongside continued investment in sales and business development.

The Invetsors Takeaway for ELS

While the fundamentals are clearly improving, the uncomfortable reality is that a lot of this progress was already priced in. The share price had effectively assumed a strong growth path and stronger earnings, so even a good result can still be “not good enough” if expectations have run ahead of the numbers.

we suspect the market is simply recalibrating after a sharp run, as investors step back and ask whether the valuation got too stretched relative to where the business is today.

From our perspective, this is the type of name that belongs on a watchlist rather than an immediate buy. It still screens well against the defence tailwind, and the underlying business momentum looks strong. The difference is that I would prefer to wait for a better entry point where the risk to reward feels more favourable.