Shares of Elastic (ESTC 1.46%) rose 40.2% in December 2023, according to data from S&P Global Market Intelligence. The Dutch-American expert in enterprise data search and related functions posted a terrific earnings report at the end of November. Elastic's stock closed 37.1% higher the next day -- and hasn't looked back from its newfound plateau.
The fuel for Elastic's December fires
The company's Elasticsearch data search and analytics platform gained 200 new customers in the second quarter of fiscal year 2024, lifting the total count to 20,700 names. The growth rate was more than twice as fast among high-value clients with annual contracts worth $100,000 or more.
As a result, revenues rose 17% year over year to $311 million, and Elastic showed adjusted earnings of $0.37 per diluted share. The average Wall Street analyst would have settled for earnings near $0.24 per share on approximately $304 million in top-line sales, so Elastic exceeded the consensus analyst targets with ease.
The strong market reaction made perfect sense in light of Elastic's robust financial results. The company delivered four Street-stumping earnings reports last year, and the stock has now gained 109% since the end of 2022.
NYSE: ESTC
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Elastic's AI-driven road ahead
Despite the soaring financial reports and equally buoyant stock price, Elastic investors are still nursing net losses in the long term. Share prices are still down by 42% from the all-time peak in November 2021, when the global inflation crisis undermined investor confidence in unprofitable growth stocks.
By now, Elastic has reestablished itself as a high-growth market darling. Sales are soaring at double-digit annual growth rates, and the stock trades at 97 times Elastic's full-year earnings guidance.
And of course, Elastic's success is ground in artificial intelligence (AI). Elasticsearch helps AI experts collect, manage, and analyze the data they need for training large language models (LLMs) and other generative AI systems.
"Generative AI is driving a resurgence of interest in search as customers use semantic search, vector search, and hybrid search to ground large language models with their private business context," Elastic CEO Ash Kulkarni said on the Q2 earnings call. "Elasticsearch Relevance Engine provides the most comprehensive and enterprise-ready platform for these use cases."
Perhaps the most exciting part of the generative AI opportunity is that it hasn't contributed any meaningful growth to Elastic's sales and earnings yet. Today's customer discussions may lead to future contracts, boosting Elastic's long-term progress for years to come.
So the stock isn't cheap today, but it's a classic high-growth investment with promising business prospects on the horizon. If you don't mind the elevated valuation, a modest position in this unconventional AI stock should serve you well over the long haul.
