New Price Target for Elastic NV Amid AI Expansion

We are boosting our price target on the shares of One-rated Elastic NV ESTC to $140 from $130 to account for the company’s January quarter earnings report and issued upsized guidance.

The drivers behind the quarter’s performance and improved outlook tie back to continued customer and subscription revenue growth mixed with growing operating leverage. Elastic’s results also confirm the growing adoption of AI in enterprises, and we see that supporting the Portfolio’s position in ESTC shares, but also those for ServiceNow NOW.

It also speaks to our thoughts that, as enterprise and consumer AI adoption continues, ongoing capacity constraints in data centers and networks will drive capex dollars. Connecting those dots keeps us bullish on several other Portfolio holdings including Nvidia NVDA and Marvell MRVL.

Getting back to ESTC shares, we are going to see others boost their price targets on Friday and that may give an extra boost to the post-earnings reaction in the shares. For folks who have missed out on ESTC shares, our message is to not chase the shares now but wait for them to settle after Friday's pop. Remember, we have a big week of economic data next week that, if it reaffirms what we saw in the February Flash PMI data, could spook an already nervous market. Should that come to pass and we see ESTC shares give back some of today’s gains, that would be a more opportune time to add some shares.

As we lift our price target, we will also nudge our panic point for ESTC shares to $90 from $85.

Our Take on Elastic’s January Quarter

Total revenue for the quarter rose 17% year over year to $382 million, topping the $368.7 million consensus. Subscription revenue in the quarter totaled $358 million, up 16% year over year, fueled primarily by Elastic Cloud revenue of $180 million, up 26% compared to the year-ago quarter and 7% sequentially.

Parsing Elastic’s figures from a different perspective, the total customer account moved past 21,350 compared to 21,000 in the year-ago quarter, but what should stand out is the larger gains achieved in subscription revenue per customer. That metric rose 13% year over year, confirming Elastic continues to win more business across its growing customer base.

Supporting that is the continued step up in the number of customers in its over $100,000 and over $10,000 revenue buckets. Exiting the January quarter, there were more than 1,460 customers in the over $100,000 bucket and 4,540 in the over $10,000 bucket, compared to 1,270 and 4,290 at the end of the January 2024 quarter. Examining those same metrics compared to the prior October 2024 quarter also shows Elastic winning more customer spending dollars.

Benefitting From AI Adoption

Part of what is fueling those wins, as we’ve been discussing with you, is the shift in enterprise spending toward AI. During the earnings call, Elastic shared that it has over 1,750 Elastic Cloud customers who are using its Gen AI solutions with over 270 of them spending $100,000 or more annually. On the one hand, those figures are up from 1,550 customers and 240 of them over $100,000 from the October quarter, but the more telling way to look at this is 18.5% of its over $100,000 customers are Gen AI customers, up from 10.9% a few quarters ago.

To us, that is a clear signal its enterprise customers are adopting AI to drive a combination of productivity and improved customer experiences. For Elastic, that means price recognition and margin expansion.

And improving margins are the second leg of our thesis behind owning ESTC shares in the Portfolio. Our thinking has been that as the company continues to scale its subscription revenue and benefits from higher AI pricing as well as high incremental margins associated with software, we would see operating leverage take hold.

We saw that in the last few quarters and yet again in the January one as its adjusted operating margin reached 16.8% up from 13.2% in the year-ago quarter. A better demonstration is looking at adjusted operating margins over the trailing three quarters, and that analysis shows an expansion of about 300 basis points to just over 15%.

We Suspect Elastic’s Outlook Skews Conservative

When we discussed Elastic’s October quarter results, we shared our view the company’s guidance skewed conservative. We will make that same argument with its outlook for the current quarter. Management guided its top line to $379 million to $381 million, above the $374.2 million consensus, and that outlook is supported by Elastic’s deferred revenue that stood at $707 million at the end of January versus $646 exiting October. Remaining Performance Obligations also rose nicely on a sequential basis to $1.354 billion from $1.266 billion.

Where we suspect Elastic is being conservative is in its margin guidance as it calls for its adjusted operating margin to jump to 13.5% in the current quarter, up from 8.6% in the April 2024 quarter. Now, you may be thinking that is a big year-over-year increase, and it is, but it compares to the adjusted operating margins of 16.8% to 17.6% posted in the last two quarters. Granted, most companies tend to have extra expenses in their final quarter of their fiscal year, which is the current one for Elastic, but the increasing mix shift toward higher priced AI services suggests that margin guidance is likely to skew conservative.

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At the time of publication, TheStreet Pro Portfolio was long ESTC, NVDA and MRVL.