We Will Unlock New Opportunities With Generative AI And Serverless

Key Takeaways

• Investment in AI and generative applications expands market potential, driving long-term revenue growth and market presence.
  
• Product and field segmentation innovations aim to enhance customer value, improve margins, and boost revenue through efficient, scalable offerings.
  
• Unanticipated sales issues, currency fluctuations, and strategic investments could pressure Elastic's revenue growth and net margins amid prudent guidance.

Catalysts

A search artificial intelligence (AI) company, delivers hosted and managed solutions designed to run in hybrid, public or private clouds, and multi-cloud environments in the United States and internationally.

• Elastic's investment in generative AI applications, including semantic search and RAG-based applications, is expected to expand their addressable market, providing long-term tailwinds for revenue growth.
  
• The adoption of Elastic's Serverless offering, providing a more efficient and scalable product, is anticipated to drive future revenue growth and improve gross margins.
  
• Elastic's field segmentation changes, focusing on enterprise and high-potential mid-market customers, aim to drive stronger sales execution and revenue growth by increasing customer lifetime value.
  
• Continued consolidation of observability and security solutions onto Elastic's platform is expected to enhance operational efficiencies and reduce customer total cost of ownership, driving commitment and potentially expanding operating margins.
  
• The introduction of new product innovations such as Elasticsearch Logsdb index mode and vector database enhancements is poised to drive customers toward higher-tier subscriptions, potentially increasing average revenue per user.

Elastic Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Elastic compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Elastic's revenue will grow by 19.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -9.3% today to 4.2% in 3 years time.
• The bearish analysts expect earnings to reach $100.7 million (and earnings per share of $0.99) by about May 2028, up from $-132.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 124.8x on those 2028 earnings, up from -66.4x today. This future PE is greater than the current PE for the US Software industry at 33.3x.
• Analysts expect the number of shares outstanding to grow by 2.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.77%, as per the Simply Wall St company report.

Elastic Future Earnings Per Share Growth

Risks

• The company experienced some unanticipated sales execution issues in Q1 when they implemented field segmentation changes. These issues could negatively affect revenue growth if they recur or if similar challenges emerge in the future.
  
• Elastic's non-GAAP operating margin, while currently healthy, will see only modest expansion in fiscal '26 due to planned investments in GenAI and other growth areas, which could pressure net margins.
  
• The company will face a sequential revenue headwind in Q4 due to having three fewer days than in previous quarters, impacting total revenue growth.
  
• The recent strengthening of the U.S. dollar is estimated to cause a revenue headwind of about one to two million dollars in Q4, potentially affecting revenue and earnings.
  
• The guidance reflects prudence due to uncertainties in the markets, including risks associated with the U.S. public sector and the variability in consumption revenue, which could impact both revenue and net margins.

Valuation

• The assumed bearish price target for Elastic is $89.66, which represents two standard deviations below the consensus price target of $127.86. This valuation is based on what can be assumed as the expectations of Elastic's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $160.0, and the most bearish reporting a price target of just $75.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.4 billion, earnings will come to $100.7 million, and it would be trading on a PE ratio of 124.8x, assuming you use a discount rate of 7.8%.
• Given the current share price of $84.52, the bearish analyst price target of $89.66 is 5.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.