1 Overlooked Artificial Intelligence (AI) Stock Down 54% to Buy Hand Over Fist, According to Wall Street

When it comes to artificial intelligence (AI) stocks, the likes of Nvidia, Palantir Technologies, and Microsoft typically get most of the attention from investors. But this industry is expanding rapidly, and so are the potential opportunities.

Elastic N.V. (ESTC 1.12%) developed a portfolio of AI software products to help businesses turn their data into useful tools for their employees and customers. Demand is climbing fast, which recently drove an acceleration in the company’s revenue growth.

Elastic stock remains 54% below its 2021 record high, when a frenzy in the tech sector drove its valuation to an unsustainable level. However, the majority of the analysts tracked by The Wall Street Journal have given the stock a buy rating, with none recommending selling, so there could be an opportunity here for investors. Let’s dive in.

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Helping businesses solve big-data problems

According to the International Data Corporation, around 480 exabytes of new data are created every single day. To put things in perspective, a single exabyte is one million terabytes, so it’s no surprise businesses are struggling to manage this enormous pile of information, let alone extract value from it.

Elastic created an innovative tool called Elasticsearch, which sits on top of an organization’s internal data. It allows employees to run simple search queries using natural language to find information, as opposed to manually digging through thousands of different documents. For example, if an employee wants to know the organization’s policy on hybrid work, but can’t locate the specific document, Elasticsearch can pull the information they need instantly.

Elastic created a new platform called Search AI to make the user experience even more powerful. It enables businesses to build generative AI into Elasticsearch, which leads to higher-quality responses even if queries contain fewer words or less contextual information. Plus, it can reduce the response time from minutes to milliseconds.

Search AI can also bring a unique search experience to sales channels, transforming the way customers buy products.

Let’s say a customer wants to build a retaining wall in their backyard; in the past, they would use a tool like Alphabet‘s Google Search to figure out what products they need. But through a website powered by Search AI, the customer can enter a query like “what tools and materials do I need to build a 100-foot-long, 4-foot-high brick retaining wall?” The website will then return a curated list of products they can buy with a couple of clicks.

Accelerating revenue growth

Elastic generated $415 million in revenue during its fiscal 2026 first quarter (which ended on July 31). It was a 20% increase from the year-ago period, which marked an acceleration from the 16% growth the company delivered in the prior quarter three months earlier. It was also comfortably above management’s forecast of $397 million.

The result was partly driven by high-spending businesses. At the end of Q1, Elastic had a record 1,550 customers with annual contract values of at least $100,000, which highlights how important its products are becoming within large, complex organizations.

Elastic managed to deliver the impressive Q1 revenue result while carefully managing costs to improve its bottom line. The company’s total operating expenses increased by just 13% year over year, which was a much slower pace than the increase in its revenue. Therefore, while Elastic still lost $24.6 million on a generally accepted accounting principles (GAAP) basis, it was a 50% reduction from the $49.2 million net loss it generated in the year-ago period.

On a non-GAAP (adjusted) basis, which excludes one-off and non-cash expenses like stock-based compensation, Elastic was actually profitable to the tune of $64.8 million during Q1. That represented a whopping 74% increase from its year-ago result.

Wall Street is bullish on Elastic stock

The Wall Street Journal tracks 30 analysts who cover Elastic stock, and 19 have assigned it a buy rating. Three others are in the overweight (bullish) camp, while the remaining eight recommend holding. None recommend selling.

The analysts have an average price target of $119.91, which implies a potential upside of 42% over the next 12 to 18 months. But the Street-high target of $150 suggests Elastic stock could soar by 77% instead.

Based on Elastic’s current valuation, I think those targets are achievable. Its stock was trading at a sky-high price-to-sales (P/S) ratio of almost 30 in 2021, which was completely unsustainable. However, the company’s consistent revenue growth since then, combined with the decline in the stock, has pushed its P/S ratio down to a more reasonable level of 5.7. In fact, that is close to Elastic’s cheapest valuation since it went public in 2018:

ESTC PS Ratio data by YCharts

According to Cathie Wood’s Ark Investment Management, AI could create a staggering $13 trillion opportunity in the software space by 2030 as businesses arm themselves with powerful productivity-boosting tools, which is exactly what Elastic offers. That implies a very long runway for potential growth based on the company’s current revenue, so I think Wall Street’s bullish consensus on this stock is justified.