We're Cutting Our Price Target for This Holding... But Looking to Buy More

Shares of Pro Portfolio holding Elastic N.V. ESTC are under pressure Friday morning. This despite the company delivering a consensus-topping April-quarter earnings report and issuing better-than-expected EPS guidance for the coming year. 

In our view, the market is focusing on two things — a very modest revenue guidance shortfall for the coming year, and Wall Street firms taking a more conservative stance with their ESTC price targets. We can’t blame those firms for taking such actions given current market dynamics. Indeed, we've done the same thing with other Pro Portfolio positions in recent weeks, and today, we’re also trimming our ESTC target, to $120 from $140.

However, when we examine Elastic's expanding customer base and contract wins, and the mix shift toward its AI business that carries favorable pricing and margins, we see multiple reasons that support our thinking that once again company management team is delivering conservative guidance. While the shares come under pressure, understanding the dynamics at play and the growing number of data points and other signals for AI adoption in the enterprise, we’ll stand to the side today and look to pick up additional ESTC shares at more favorable prices in the very near-term. 

We continue to rate ESTC shares a One. Given our intended move we will suspend our $78 panic point and reset that level shortly.

Elastic’s April Quarter and Outlook

For its April quarter, Elastic delivered revenues of $388.4 million and EPS of $0.47, which bested Wall Street’s consensus forecasts of $380.36 million and $0.37, respectively. The near 16% year-over-year increase in revenue was tied to the 23% jump in Elastic Cloud revenue to $182 million, which in turn helped drive overall subscription revenue to $362 million. While we can see the percentage of subscription revenue to total revenue at Elastic inching higher or lower quarter to quarter, at 93.2% for the April 2025 quarter it continued to account for more of the overall revenue mix compared to the year-ago quarter.

The combination of higher revenue, and subscription revenue accounting for more of the overall mix, reflects Elastic continuing to win new customers and garnering larger contract wins across that expanding customer base. While the company’s overall customer base expanded to more than 21,500 exiting the April 2025 quarter, compared to 21,000 a year earlier, the number of customers with over $1 million in committed contract value rose to 210, a far larger jump of 27% versus 165 at the end of the April 2024 quarter. Impressive, but that figure pales compared to the more than 100% year-over-year jump in the number of Elastic’s GenAI customers with an annual committed contract value of more than $100,000. For those keeping score, the company’s total number of GenAI customers topped 2,000 in the April quarter, representing close to 10% of its overall customer base.

That mix shift and the ability to spread opex costs across a wider base of revenue helps explain the improving margin profile at the company. As that mix shift continues and more operating leverage is recognized, we should see that expansion continue.

Putting the above figures together explains the continued year-over-year and sequential growth in two key metrics we like to track for the company — deferred revenue and remaining performance obligations (RPOs). Exiting the April quarter, RPOs stood at $1.545 billion, up double-digits, while deferred revenue climbed 35%, compared to year-ago levels, to reach $852 million. Of that RPO count, current remaining performance obligations (CRPO), which should become booked revenue in the coming 12 months, rose 18% to ~$1 billion. 

During the earnings call, management cited multiple large contract wins, including an eight-figure expansion deal “with a global financial institution,” and a “multiyear seven-figure expansion deal with a leading international banking group in 50 plus global market.” To its credit, the management team called out pressure in the U.S. public sector, however, our view continues to be that as AI adoption unfolds in that market, Elastic should benefit.

These figures lead us to think Elastic’s revenue guidance for fiscal year 2026 of $1.655 billion-$1.67 billion, a wee bit below the $1.68 billion Wall Street consensus, skews conservative. We’ve made that comment before when it comes to Elastic, and the company has delivered consensus-topping results since we’ve owned the shares. Supporting our thoughts on this, when Elastic discussed its guidance on the earnings call, it said that “Although we did not see macro impacts beyond the U.S. public sector in Q4, we extrapolated constraints that we saw in the U.S. public sector to potentially extend to our broader business. This is the largest factor affecting our revenue guidance range.”

That level of conservatism likely extends to Elastic’s operating margin guidance of 16% for the coming year. While that shows nice expansion compared to the 15.2% posted for the trailing 12 months, the favorable pricing and margin impact of the company’s GenAI business suggests when we close the books on Elastic’s fiscal 2026 this time next year, the operating margin level will likely be ahead of that forecasted figure. Remember, that 15.2% figure for the trailing 12 months was well ahead of the 11.7%-12.3% guidance provided this time last year. Granted, each point of margin improvement becomes incrementally harder to win, but we would be surprised if Elastic’s operating margin for the coming 12 months was only 16%. 

When Elastic presents at the Bank of America Global Technology Conference on June 4 and the Rosenblatt Technology Summit on June 11,  we'll get another chance to assess to what degree the company's guidance is overly conservative. 

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