Why Elastic (ESTC) Stock Is Trading Lower Today
What Happened:
Shares of search software company Elastic (NYSE:ESTC) fell 17.7% in the morning session after the company reported third-quarter results with decelerating customer growth and net retention rate. Guidance was generally fine, with revenue and adjusted operating margin guidance in line with to above expectations. Zooming out, this was still a decent, albeit mixed, quarter, showing that the company is staying on track. However, the stock is down as investors were likely expecting more.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Elastic? Access our full analysis report here, it's free.
What is the market telling us:
Elastic's shares are very volatile and over the last year have had 16 moves greater than 5%. But moves this big are very rare even for Elastic and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 3 months ago, when the stock gained 17.7% on the news that the company reported a "beat and raise" quarter. Second quarter results beat analysts' billings, revenue, and non-GAAP EPS expectations.
Management stated that "...thoughtful investments and innovation in AI has continued to drive customer excitement and engagement...Generative AI is driving a resurgence of interest in search as customers use semantic search, vector search, and hybrid search to ground large language models with their private business context..." While next quarter's revenue guidance was in line, non-GAAP operating profit guidance was ahead, showing stronger-than-expected profitability. Lastly, the company raised its full year outlook for revenue, non-GAAP operating profit, and non-GAAP EPS. Overall, the results were strong.
Following the results, Wells Fargo analyst Andrew Nowinski raised the stock's rating from Equal Weight (Neutral) to Overweight (Buy) and increased the price target from $70 to $115. He added that "generative artificial intelligence, log analytics, security information, and event management are likely to drive a revenue re-acceleration."
Elastic is up 7.8% since the beginning of the year, but at $114.76 per share it is still trading 14.2% below its 52-week high of $133.81 from February 2024. Investors who bought $1,000 worth of Elastic's shares 5 years ago would now be looking at an investment worth $1,232.
Today’s young investors likely haven’t read the timeless lessons in Gorilla Game: Picking Winners In High Technology because it was written more than 20 years ago when Microsoft and Apple were first establishing their supremacy. But if we apply the same principles, then enterprise software stocks leveraging their own generative AI capabilities may well be the Gorillas of the future. So, in that spirit, we are excited to present our Special Free Report on a profitable, fast-growing enterprise software stock that is already riding the automation wave and looking to catch the generative AI next.
