UBS Initiates Coverage on Elastic with a Buy Rating, Citing AI Potential

UBS has begun coverage on Elastic NV (NYSE:ESTC) with a Buy rating, emphasizing the company's underestimated potential in the AI sector. The investment bank has set a price target of $135 on Elastic's shares, suggesting significant upside.

Key Insights and Projections:

• Valuation: Elastic's stock is currently trading at 6.9 times CY25 estimated revenues, which UBS believes does not fully capture its promising AI opportunities.
• Price Target: UBS has set a price target of $135, reflecting strong growth prospects.
• Elasticsearch Relevance Engine (ESRE): Expected to add $15 million in incremental FY25 revenues.
• Growth Projections: UBS forecasts an 18.7% growth rate for FY25, surpassing the consensus estimate of 17.3%.

Growth Drivers:

• AI Investments: Customer feedback indicates substantial investment in Elastic's AI capabilities, with spending expected to increase by 15% this year.
• Market Incumbency: Elastic's established position in the market gives it a competitive edge over pureplay vector databases.
• Hybrid Search Model: Elastic's unique approach to search enhances its appeal.
• Partner Growth: Expected partner growth outlook for 2024 is between 20-30%.
• Competitive Advantage: Potential benefits from displacing competitors like Splunk (NASDAQ:SPLK) with early reports of successful migrations and cost advantages.

Observability and Security Suite:

While broader adoption of Elastic's Observability and Security suite is still in progress, UBS's checks indicate positive overall feedback.

Elastic's prospects are strengthened by its strategic focus on AI and its established market position. UBS's optimistic outlook is supported by anticipated revenue growth, customer investments, and competitive positioning in the AI sector.

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