Elastic Earnings: Despite Macro Headwinds, Company Confident in Its Growth Opportunity

We are maintaining our $62 fair value estimate for narrow-moat Elastic ESTC after the firm reported fiscal fourth-quarter results in line with our estimate for revenue and exceeding our bottom-line estimate. Management’s fiscal 2024 first-quarter guidance skewed on the conservative side, as weakness in demand is expected to persist for the first half of the upcoming fiscal year, driven by the challenging macroenvironment. Elastic also recently announced its AI-powered Elasticsearch Relevance Engine, which it believes will be a strong contender for generative artificial intelligence in enterprises. With the shares down 7% after hours, we would recommend investors wait for a more attractive entry point to invest in this Very High Uncertainty-rated company.

Fourth-quarter sales clocked in at $280 million, up 17% year over year. Despite a turbulent macroenvironment inducing customers to rethink their IT spending, management highlighted solid customer contractual commitments as customers continue to consolidate on Elastic’s platform. We anticipate macro-induced tightness will affect sales over the coming quarters and are modeling a rebound in demand toward the second half of fiscal 2024.

Elastic’s cloud business continued to shine, with cloud-based sales increasing 28% year over year. Elastic cloud sales now constitute approximately 40% of total revenue, up from 37% a year ago. In the quarter, the firm saw a 21% increase in the number of customers with an annual contract value of greater than $100,000. While this growth rate is lower than what Elastic has enjoyed in previous quarters, we remain impressed by the firm’s ability to continue capturing higher-value customers in a tight macroenvironment.