The stock market is having an incredibly strong year in 2023 with the Nasdaq-100 technology index soaring 47% so far. Even so, the artificial intelligence (AI) sector is outperforming it with monster gains by some of its most popular names:
- Nvidia is up 226% for the year.
- C3.ai is up 179%.
- Amazon is up 71%.
- And Microsoft is up 56%.
But one lesser-known stock caught investors' attention last week, when it surged 37% in a single day following the release of its financial results for the recent fiscal 2024 second quarter (ended Oct. 31). That stock is Elastic N.V. (ESTC 2.52%).
Wall Street is incredibly bullish on this enterprise software company, which is quickly building a presence in AI, but can its stock continue to march higher? Here's what you need to know.
Elastic is transforming enterprise-level search
Data is the nectar of modern organizations, and the amount we generate is growing rapidly. From 2025 onward, we will be creating 480 exabytes of data every single day according to the International Data Corporation (a single exabyte is equivalent to 1 million terabytes). That number will only increase with time.
That data is incredibly powerful when harnessed correctly, and Elastic is helping 20,700 businesses get the most from it through its search, observability, and security platforms.
Its Elasticsearch is perhaps the most intriguing. It's a fully customizable tool that organizations can use to give employees a comprehensive search experience based on internal data. For example, employees can quickly find details on everything from company policies to customer data, without having to open multiple documents or applications.
Similarly, it can be used in customer-facing channels like an e-commerce retail website. It can parse mountains of data to deliver responses within milliseconds, which is especially useful in large organizations with lots of moving parts.
However, the widespread adoption of AI is taking Elasticsearch's abilities to the next level.
The Elasticsearch relevance engine (ESRE) is designed to help developers build AI into their search applications. ESRE allows for semantic search, meaning employees and customers can generate results using natural language, which reduces the need for specificity and unlocks a new layer of potential.
Elastic provided a great example in its recent investor presentation. If you had to build an irrigation system in your backyard, what would you do? First, you might search Google for instructions, then you might visit the website of your local hardware store and search for each specific product required for the job.
However, if that website has a search function powered by ESRE and AI, you could simply ask what materials and tools are required to complete the irrigation system, and then be shown a full list of products -- all you'd have to do is click "buy." You could also enter your location and the size of your backyard to add context and generate refined results specific to your situation.
Image source: Getty Images.
Elastic is delivering steady growth while improving its bottom line
Elastic just reported its financial results for the fiscal 2024 second quarter. Like most tech companies, it has grappled with the challenging economy, with its elevated inflation and rising interest rates, but it continues to make progress across key metrics.
Revenue came in at $311 million, representing 17% year-over-year growth. It was also comfortably above its forecast of $305 million. On the flip side, the result marked a slowdown from the 28% revenue growth in the same quarter last year.
Beneath the surface of the headline number, however, there was a bright spot. More customers are deploying the company's platforms in the cloud because it offers more versatility and, as a result, Elastic Cloud revenue soared by 31% year over year. That actually marked a growth acceleration over the first quarter as opposed to a slowdown.
But, as I mentioned, the economy is a headwind right now -- not only for demand but also because Elastic is more carefully managing its costs to improve its bottom line. In the second quarter, the company increased its operating expenses by only 5%, and because its revenue grew at a much faster pace, it meant the company reduced its net loss by 47% to just $24.8 million.
That is a positive step on Elastic's path to profitability, but a reduction in spending growth for line items like marketing could lead to a further slowdown in overall revenue growth.
Wall Street is bullish on Elastic stock
As I touched on at the top, the stock has more than doubled this year and currently trades at $110.20. The Wall Street Journal tracks 25 analysts covering the company, and here's the good news: They remain quite bullish.
A total of 14 of the analysts have given Elastic the highest-possible buy rating. Two other analysts are in the overweight (bullish) camp, eight recommend holding, and one has given it an underweight (bearish) rating. Not a single analyst outright recommends selling.
But here's the rub: The average price target of the 25 analysts is just $102.16. The 37% surge in Elastic stock last Friday sent it comfortably above that target, so further upside from here appears limited.
However, as Wall Street digests Elastic's latest results, estimates will likely climb. An analyst at Wells Fargo, for example, just upgraded the stock to overweight and increased the price target big time: from $70 to $115.
Elastic is still cheap compared to other AI stocks. Based on its $1.1 billion in trailing-12-month revenue and its current valuation of $10.9 billion, its stock trades at a price-to-sales (P/S) ratio of 9.4. By comparison:
- C3.ai trades at a P/S of 12.5.
- Microsoft's P/S is 12.8.
- Nvidia has a P/S of 35.7.
With that in mind, it's entirely possible Elastic continues to gain more ground from here, and it could become a valuable piece of any tech-focused portfolio.
