Wall Street's AI Stock Pick: Elastic

Elastic: An Overlooked AI Stock?

One of the major issues facing businesses today involves handling massive amounts of data. Elastic's software, powered by artificial intelligence, aids businesses in improving data discoverability for both employees and clientele. The stock is trading near its all-time low, but Wall Street analysts are optimistic about its future.

While names like Nvidia, Palantir Technologies, and Microsoft tend to dominate discussions on artificial intelligence stocks, the sector is rapidly growing, creating more opportunities. Elastic N.V. (NYSE: ESTC) has created a suite of AI software designed to enable businesses to transform their data into practical resources for both employees and customers. The increasing demand is boosting the company's revenue growth.

Elastic stock is still 54% below its high from 2021, when the tech sector's boom pushed its valuation too high. Currently, most analysts surveyed by The Wall Street Journal recommend buying the stock, and none advise selling. This could represent a potential opportunity for investors. Let's take a closer look.

The Data Challenge

According to the International Data Corporation, roughly 480 exabytes of new data are generated daily. Considering that an exabyte equals one million terabytes, it is easy to see why businesses find it difficult to handle and extract value from this massive amount of information.

Elasticsearch and Search AI

Elastic developed Elasticsearch, a tool that overlays an organization's internal data, enabling employees to use natural language for simple search queries to locate information, rather than manually searching numerous documents. For instance, if an employee needs to find the company's hybrid work policy but cannot locate the document, Elasticsearch can provide the needed data instantly.

Elastic's Search AI platform enhances the user experience even more, allowing businesses to integrate generative AI into Elasticsearch. This leads to better responses, even when queries are brief or lack context. Also, it can reduce the time it takes to respond from minutes down to milliseconds. Search AI can also enhance sales channels, revolutionizing the way customers purchase goods. Imagine a customer wanting to construct a retaining wall in their yard. Instead of using a search engine, they could use a website powered by Search AI to ask, "what tools and materials do I need to build a 100-foot-long, 4-foot-high brick retaining wall?" The website then generates a curated list of products for purchase with just a few clicks.

Financial Performance

During its fiscal 2026 first quarter, which ended on July 31, Elastic generated $415 million in revenue, a 20% increase from the previous year. This was faster than the 16% growth in the previous quarter and exceeded management's prediction of $397 million. High-spending businesses were a major factor in the result. Elastic had 1,550 clients with annual contract values of at least $100,000 at the end of Q1, demonstrating the rising significance of its products in large, complex organizations.

Elastic delivered impressive Q1 revenue while managing costs to boost its bottom line. The company's total operating expenses grew by only 13% year over year, much slower than the increase in its revenue. As a result, while Elastic still lost $24.6 million on a GAAP basis, it was a 50% reduction from the $49.2 million net loss from the prior year. Elastic was actually profitable on a non-GAAP (adjusted) basis, which excludes one-off and non-cash items like stock-based compensation, with earnings of $64.8 million during Q1. That was a 74% rise from the previous year.

Analyst Ratings

The Wall Street Journal tracks 30 analysts covering Elastic stock, with 19 giving it a buy rating. Three others are overweight (bullish), and the other eight recommend holding. None advise selling. The analysts' average price target is $119.91, suggesting a possible 42% upside over the next 12 to 18 months. However, the Street-high target of $150 indicates Elastic stock could increase by 77%.

Based on Elastic's current valuation, those targets appear attainable. The stock traded at a very high price-to-sales (P/S) ratio of nearly 30 in 2021, which was unsustainable. Since then, consistent revenue growth combined with the stock's decline has lowered its P/S ratio to a more reasonable 5.7. That is near Elastic's lowest valuation since its IPO in 2018.

According to Cathie Wood's Ark Investment Management, AI could generate a $13 trillion opportunity in the software market by 2030 as businesses adopt productivity-boosting tools, which is exactly what Elastic provides. This suggests considerable potential for growth based on the company's current revenue. Therefore, Wall Street's positive outlook on this stock is justifiable.