Stocks like Nvidia, Microsoft, Amazon, and C3.ai have been the go-to choices for investors trying to capture some of the incredible value artificial intelligence (AI) is creating right now.
But the AI landscape is expanding rapidly, and a number of other companies developing the technology are still waiting to be discovered. Elastic NV (ESTC 2.52%) is one of them. Its generative AI models are transforming the way organizations and individuals search for data, and they are attracting significant demand at the moment.
Elastic stock is up more than 80% over the last 12 months, but it remains 44% below its all-time high. It could deliver plenty of value for investors going forward if its recent momentum continues. Here's why it might be time to buy.
Elastic's AI-powered search technologies are transformative
According to the International Data Corporation's future projections, we will be creating a mind-boggling 480 exabytes (480 million terabytes) of data every day from the year 2025 onwards. Digitization is affecting every facet of our lives, and every online interaction etches a new data point.
Data is incredibly valuable for businesses if they can harness it correctly, but that will become increasingly difficult as the sheer volume grows. Around 20,800 businesses have already turned to Elastic to help solve that problem, primarily through its innovative search technology.
Elasticsearch is built on top of an organization's internal data to give employees an easy way to find the information necessary for their jobs. This tool eliminates the need to open multiple documents, because employees can enter a simple query to find everything from customer details to company policies. Elasticsearch can also be applied to sales channels to help customers quickly find products on a business's website, for example.
AI is now elevating Elasticsearch's capabilities. The Elasticsearch Relevance Engine helps businesses create generative AI experiences for employees and customers.
Elastic provided some good use-case examples in a recent investor presentation. By using AI, a customer won't necessarily have to know what product to look for on a website. Let's say they want to install an irrigation system in their backyard -- an AI-powered search engine allows the customer to enter a query like "What material list and tools do I need to build an irrigation system for a 1-acre backyard in Gilroy, CA?"
An AI engine underpinned by sound data will produce a list of necessary tools, products, and potentially even regulations to consider when completing the work. This saves the customer significant amounts of time, and delivers an unparalleled level of convenience. Eventually, businesses that don't offer a similar experience might be left behind, and that spells opportunity for Elastic.
Elastic is growing steadily, and profitably
Elastic reported its financial results for the fiscal 2024 third quarter (ended Jan. 31). The company generated $327.9 million in revenue, which was a 19% increase from the year-ago period. That was comfortably above the company's guidance of $321 million, and it also marked a sequential acceleration in growth.
But Elastic's profitability might be the real story. The company's Q3 net income (profit) came in at $176.1 million, which was a positive swing from the $72.5 million net loss it incurred in Q3 last year.
There were two reasons for the strong result. First, Elastic's operating costs were flat year over year, which allowed more money to flow to the bottom line. Second, the company received a $200 million income tax benefit.
With that said, Elastic's non-GAAP net income -- which strips out one-off and non-cash expenses -- came in at $37.6 million, which was a 122% increase from the year-ago period. Therefore, any way investors look at it, Elastic is improving its profitability. That's key in the current economic climate, because interest rates are at a two-decade high, which makes it very expensive to access fresh capital.
Why Elastic stock is a buy now
Elastic stock is up 80% over the last 12 months. But it's currently taking a breather with a 10% loss in 2024 so far, and it remains 44% below its all-time high.
However, the stock is cheap relative to some of its peers in the AI industry. Based on Elastic's trailing 12-month revenue of $1.2 billion and its current market cap of $10.4 billion, it trades at a price to sales (P/S) ratio of just 8.5. The chart below shows how that stacks up compared to other popular AI stocks:
NVDA PS Ratio data by YCharts
Plus, The Wall Street Journal tracks 26 analysts covering Elastic stock, and 15 of them have given it the highest-possible buy rating. One more is in the overweight (bullish) camp, with eight recommending to hold, and one rating it underweight (bearish). No analyst recommends selling. Their average price target of $134.03 implies a 33% upside from where it trades today, but the Street-high target of $171 suggests Elastic stock could soar 70%.
Considering the growing demand for AI, Elastic's recent acceleration in its quarterly revenue growth, and its attractive valuation, investors might do well to buy the stock now with the intention of holding for the long-term.
