Investment In GenAI And Sales Expansion Will Strengthen Future Market Share

Key Takeaways

• Strategic focus on generative AI and platform consolidation is enhancing market position and driving future revenue growth.
  
• Investments in sales force and growth areas improve operating leverage, supporting margin improvement and sustained revenue growth.
  
• Leadership instability and execution risks in AI adoption may hinder Elastic's revenue growth amidst competitive pressures and currency exchange challenges.

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 strategic focus on generative AI and its vector database capabilities is driving significant customer interest and new commitments. This is likely to positively impact future revenue as they capture more market share in AI-powered search and application development.
  
• The company's successful platform consolidation efforts, which help reduce complexity and lower total cost of ownership for customers, could significantly enhance net margins as Elastic becomes more integral to their customers' IT infrastructure.
  
• Innovation in AI capabilities and strategic product enhancements, such as better binary quantization, positions Elastic strongly in the market, potentially driving increased revenue by distinguishing its offerings from competitors.
  
• Elastic's investment in its sales force and improved sales execution, specifically targeting high-potential mid-market and enterprise customers, is expected to support continued revenue growth, especially as the company recovers from past disruptions.
  
• Elastic is strategically increasing its investment in growth areas like GenAI while maintaining strong operating leverage. This balanced approach is expected to improve overall earnings by driving higher margins and sustained revenue growth.

Elastic Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elastic's revenue will grow by 16.0% annually over the next 3 years.
• Analysts are not forecasting that Elastic will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Elastic's profit margin will increase from 4.4% to the average US Software industry of 11.3% in 3 years.
• If Elastic's profit margin were to converge on the industry average, you could exepct earnigns to reach $243.7 million (and earnings per share of $2.1) by about January 2028, down from $60.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 73.7x on those 2028 earnings, down from 201.3x today. This future PE is greater than the current PE for the US Software industry at 43.6x.
• Analysts expect the number of shares outstanding to grow by 4.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Elastic Future Earnings Per Share Growth

Risks

• The departure of the Chief Financial Officer, Janesh Moorjani, could cause leadership instability, especially during a time requiring focused financial strategy, potentially impacting revenue and earnings.
  
• Although Elastic’s strong performance in Q2 was noted, the Q1 sales disruption remains a headwind, particularly affecting cloud revenue, which could limit growth in revenue and net margins.
  
• The financial guidance for fiscal 2025 highlights a prudent approach due to potential fluctuations in consumption rates and currency exchange headwinds, which might constrain revenue growth.
  
• There's heavy reliance on generative AI to fuel future growth, yet uncertainties about adoption rates and industry-specific demand could present execution risks, impacting future revenue and earnings.
  
• Monitoring is needed for competitive pressures in both the GenAI space and traditional SIEM markets, as competition could limit Elastic's ability to expand its market share, impacting revenues.

Valuation

• The analysts have a consensus price target of $126.2 for Elastic based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $150.0, and the most bearish reporting a price target of just $93.12.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $243.7 million, and it would be trading on a PE ratio of 73.7x, assuming you use a discount rate of 7.1%.
• Given the current share price of $117.25, the analyst's price target of $126.2 is 7.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.