The stock market is currently experiencing a significant sell-off, with the technology sector particularly affected by the downturn. As of this writing, the tech-heavy Nasdaq Composite has seen a decline of 11% from its all-time high, while the more diversified S&P 500 index has dropped by 7%. This trend highlights the volatility that often accompanies market corrections, which, despite their challenges, can present lucrative buying opportunities for savvy investors.
Historically, the U.S. stock market has demonstrated resilience, consistently reaching new highs over time. This enduring trend suggests that current corrections may be ideal moments to invest. For those searching for an artificial intelligence (AI) stock available at a bargain, Elastic N.V. (ESTC -3.66%) could be a strong candidate. This company is trading at a compelling valuation, especially given its robust recent financial performance.
Currently, Elastic’s stock is down significantly from its peak in 2025 and remains 46% below the record high established during the tech boom of 2021. Investors may come to regret not capitalizing on this dip when reflecting on their choices in the coming years, as the potential for recovery and growth remains high.
Transforming Big Data Challenges with AI-Driven Search Solutions
Elastic forecasts that approximately 480 exabytes of data will be generated every day by 2025. To put that into perspective, one exabyte equals 1 million terabytes, indicating an overwhelming amount of digital information. This surge is primarily driven by the increasing number of businesses transitioning their operations online, resulting in a vast array of data generated by every employee, customer, and transaction.
In response to this data explosion, Elastic has developed Elasticsearch, a powerful tool functioning as a sophisticated search engine for an organization’s internal data. Instead of manually sifting through countless documents to locate specific information, employees can effortlessly input a query into Elasticsearch, which retrieves the required data almost instantly. Additionally, this tool enhances a company’s e-commerce website, enabling customers to find the products they are looking for with remarkable speed and efficiency through the advanced search capabilities.
The introduction of the Elasticsearch Relevance Engine (ESRE) brings AI into the traditional Elasticsearch framework. This enhancement significantly improves the tool’s ability to comprehend natural language, thereby delivering accurate results even when users struggle to articulate their queries effectively. Additionally, it incorporates semantic understanding—recognizing the meanings of words and phrases—adding a new level of sophistication to the search process.
This advancement can be incredibly transformative. For instance, if someone were planning a DIY project in their backyard, they would typically conduct multiple Google searches to gather necessary materials and instructions. However, if the website of their local hardware store employs ESRE, they can simply describe their project and provide measurements, and the system will suggest all the required products and tools needed to successfully complete the task.
This streamlined experience allows users to quickly assemble a complete shopping cart and check out with just a few clicks, drastically reducing the time spent searching online with minimal additional effort.
Image source: Getty Images.
Impressive Revenue Growth and Increasing Profit Margins
During its fiscal 2025 third quarter, which ended on January 31, Elastic achieved a remarkable total revenue of $382 million, marking a 17% increase compared to the same period last year. A significant contributor to this success was Elastic Cloud, which alone accounted for $180 million of the total revenue and grew at an impressive rate of 26% year-over-year.
Utilizing Elastic Cloud for deploying tools such as Elasticsearch is becoming increasingly popular as it offers numerous advantages over traditional on-premise or self-managed solutions. By hosting the software on behalf of the customer, Elastic takes care of all server infrastructure, software updates, backups, and security measures. This hands-off approach ensures a seamless and user-friendly experience for customers, allowing them to focus on leveraging the technology rather than managing it.
The impressive results from Elastic’s third quarter are even more notable considering the company’s strategic management of expenses to enhance profitability. While the company reported a small operating loss of $4.6 million according to generally accepted accounting principles (GAAP), this represents an 82% reduction from the previous year’s operating loss of $26.6 million.
On an adjusted (non-GAAP) basis, which excludes one-off and noncash expenses, Elastic actually recorded an operating profit of $64 million. This resulted in a net profit of $67.1 million, reflecting a substantial 78% increase from the same quarter last year.
Achieving consistent profitability is crucial for Elastic, as it lays the foundation for a sustainable business model over the long term, which is likely to yield steady returns for investors while minimizing volatility.
Elastic Stock Presents a Compelling Investment Opportunity
As Elastic is not yet consistently profitable on a GAAP basis, traditional valuation metrics like the price-to-earnings ratio (P/E) cannot be applied. Instead, investors can utilize the price-to-sales ratio (P/S), which divides a company’s market capitalization by its trailing twelve-month revenue.
Currently, Elastic’s stock trades at a P/S ratio of 7.2, representing a 45% discount compared to its long-term average of 13.1 since the company went public in 2018:
ESTC PS Ratio data by YCharts.
Valuation may also play a significant role in why Wall Street maintains a positive outlook on Elastic’s future. According to The Wall Street Journal, 29 analysts follow the stock, with 19 assigning it the highest possible buy rating. Additionally, two analysts are categorized as overweight (bullish), while eight recommend holding. Notably, no analysts have suggested selling the stock.
The average price target among these analysts is $136.26, suggesting a potential upside of 40% over the next 12 to 18 months. Furthermore, the highest target of $160 indicates that the stock could potentially soar by as much as 65%.
Consequently, investors seeking opportunities in the AI sector amidst recent market volatility should seriously consider adding Elastic to their investment portfolios.
