What Happened?
Shares of search software company Elastic (NYSE:ESTC) jumped 6.6% in the morning session after Wedbush analyst Dan Ives upgraded Elastic and Snowflake, two of the SaaS stocks that reported strong financial results during the Q3 2024 earnings season.
Wedbush upgraded Elastic from Neutral to Outperform and assigned a $135 price target. With hyperscalers like Microsoft, Google and Amazon leading the first wave of the AI revolution, analyst Dan Ives believes now is the time for the broader SaaS space to join the party. Some of the catalysts supporting the thesis include: 1. Exploding AI use cases 2. Start of the enterprise consumption in 2025 3. Launch of LLM models 4. Adoption of Generative AI.
Some of the catalysts highlighted by the analyst align with the trends we have observed during the earnings season as more companies are making progress on their strategy of courting more large enterprise customers amid the growing AI boom. Also, more companies are reporting more meaningful contributions of AI products to their top line, with forecasts pointing to even more accelerated adoption.
After the initial pop the shares cooled down to $111.37, up 3% from previous close.
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What The Market Is Telling Us
Elastic’s shares are somewhat volatile and have had 14 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 3 days ago when the stock gained 30.8% on the news that the company reported a "beat and raise" quarter. Elastic blew past analysts' billings and revenue estimates, primarily driven by strong growth in the cloud business, which rose 25% year on year. Despite some of the challenges recorded in recent quarters, the improved top-line performance suggests that the focus on key enterprise and high-potential mid-market customers is bearing fruit.
On the product front, the company observed signs of accelerating demand for its Generative AI offerings. New customer commitments with GenAI almost doubled in dollar volume compared to the previous quarter, and three of the deals signed were greater than $1 million in annual contract value. Earnings also exceeded expectations as the sales strength combined with disciplined spending and improved efficiency. As a result, the company was able to provide encouraging guidance as it raised its revenue, profits, and earnings forecast for the full year.
Overall, we think this was a solid "beat-and-raise" quarter. Following the results, Baird upgraded the stock from Neutral to Outperform (Buy), citing "a significant unexpected turnaround in execution, evident in Q2′s results, highlighted by strong commitments, healthy consumption, improved win-rates and GenAI-inflection validating our medium-term/long-term thesis."
Elastic is up 4.5% since the beginning of the year, but at $111.37 per share, it is still trading 16.8% 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 $1,406.
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