Key Points
- A better-than-expected November 30 earnings report propelled Elastic's stock by over 37%.
- Wall Street's consensus view rose to $1.13 per share after the report.
- Elastic's CEO cited AI as key for rapid, low-cost generative applications.
- 5 stocks we like better than Elastic
While large-cap database stocks Oracle Corp. NYSE: ORCL and MongoDB Inc. NASDAQ: MDB are pulling back in December after November gains, mid-cap Elastic N.V. NYSE: ESTC is up 44.11% in the last month of the year.
The company credits AI as the driver for recent gains.
The company’s November 30 earnings report sent the stock soaring more than 37% higher. You can see the stock’s gap higher on MarketBeat’s Elastic chart.
Elastic is in the ranks of a fairly young tech company potentially poised to show big gains in the coming years. It went public in 2018, and has had a volatile ride, sliding downhill in 2022 along with other technology stocks.
Beat earnings by wide margin
Elastic earnings data show the company topping analysts’ views by a wide margin with net income of 37 cents a share, versus expectations of 24 cents. Revenue of $311 million was well ahead of expectations for $304 million.
That marked a 16% increase in revenue over the year-earlier quarter, with earnings up from a penny per share.
In the current quarter, the company said it expects total revenue between $319 million and $321 million, representing 17% year-over-year growth at the midpoint. Analysts were expecting $319 million.
It expects earnings per share between $0.30 and $0.32.
Elastic anticipates per-share earnings in a range between $1.06 and $1.15 for the fiscal year, which ends in April. That’s higher than the company’s earlier forecast of $1.01 to $1.11 per share, and above analysts’ consensus view of $1.08 a share.
Analysts boost price target
Since the earnings report, Wall Street’s consensus view has risen to $1.13 per share.
Elastic analyst forecasts show seven analysts boosting their price targets or upgrading their ratings on the stock since the earnings report.
The consensus view is “moderate buy” with a price target of $90.78. That’s a downside of 21.61%, but it’s not unusual for a stock, particularly one that’s relatively new, to show price action that’s significantly ahead of analysts’ views.
In addition, the stock will pull back at some point after the initial rally has worn itself out. Investors eyeing the analyst enthusiasm and company forecasts may be well served by waiting for a pullback with moving average support. Stocks frequently take a breather before resuming their rally.
The catalyst for the big uptick was AI.
Deals with major cloud providers
Elastic is a data analytics company built on the power of search. Its platform allows customers to unearth insights using AI and machine learning to sift through large amounts of data.
Its platform is available as a hosted, managed service across major cloud providers including Amazon Inc.’s NASDAQ: AMZN Web Services, Alphabet Inc.’s NASDAQ: GOOGL Google Cloud Platform and Microsoft Corp.’s NASDAQ: MSFT Azure.
“Our thoughtful investments and innovation in AI has continued to drive customer excitement and engagement with Elastic, and this was visible in our business in Q2,” said Elastic CEO Ash Kulkarni.
He added that generative AI is driving a resurgence of interest in search which is benefiting the company, as enterprise users have specific requirements.
The company’s generative AI-driven Elasticsearch Relevance Engine, rolled out in May, resulted in customers upgrading their subscription tiers.
Subscriber and cloud revenue growing
In the most recent quarter, Elastic’s tally of subscribers rose 5% year-over-year.
Revenue from Elastic Cloud grew 30%. Elastic Cloud is a fully managed service that provides analytics and search capabilities in real-time.
Analysts and investors are rethinking their assessment of AI-related stocks. After a rush of enthusiasm in the first 7 months of 2023 that saw the Technology Select Sector SPDR Fund NYSEARCA: XLK advance 44%, investors began rewarding companies for actual AI revenue rather than vague talk of potential.
AI as significant sales driver
“While it will take some time for generative AI spend to become a significant driver of our revenue, we are very excited about the long-term opportunity,” Kulkarni said.
When search powers AI, he added customers are able to quickly build generative AI applications while reducing a type of mistake called “hallucinations” at a low cost.
“Elastic's prospects as a key component of the modern IT stack for generative AI remain extremely strong,” Kulkarni said.
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