Elastic (ESTC 14.60%) stock lost its bounce on Friday, following the company's second-quarter earnings report. The enterprise search and data security expert's shares were down 11% at 2:30 p.m. ET. Around 10:40 a.m. ET, the stock had dipped as low as 16.2%.
NYSE: ESTC
Key Data Points
Strong results couldn't stop Elastic's slide
Elastic's Q2 sales rose 16% year over year, landing at $423 million. Adjusted earnings rose from $0.59 to $0.64 per share. The Street consensus had called for earnings near $0.58 per share on revenue of roughly $418 million.
So Elastic beat the analyst community's targets, and management's guidance for the next quarter was also more bullish than the current Wall Street projections.
The stock fell to multi-year lows anyway, as investors focused on a couple of bearish data points. Only 23% of Elastic's large customers are using its generative artificial intelligence (AI) tools, and the recent government shutdown pushed expected contracts into future reporting periods. Moreover, the company faces increased competition in key areas, including security and observability, which raises questions about its financial prospects in these fields.
Image source: Getty Images.
Why Elastic should bounce back from here
At the same time, Elastic is transitioning many customers from monthly payments to annual contracts, making the resulting revenues more predictable and customers more loyal. New products like the DiskBBQ search algorithm and a handy Agent Builder should support Elastic's customer and revenue growth.
And the stock is down 26% year-to-date, trading at 4.8 times trailing sales. That's a low valuation for an AI specialist with double-digit sales growth. And the modest adoption of Elastic's generative AI may be an untapped growth opportunity.
All things considered, Elastic could be a good long-term buy after this price drop. It looks like an overreaction.
