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This stock 'has a better AI opportunity than is currently priced': UBS

UBS has initiated coverage on one software company with a Buy rating, highlighting its underestimated potential in the AI sector.

According to UBS, Elastic (NYSE:ESTC) NV's stock, currently trading at 6.9 times CY25 estimated revenues, does not fully reflect its promising AI opportunities.

UBS has set a price target of $135 on the company's shares, indicating significant upside.

Elastic NV's prospects are bolstered by its Elasticsearch Relevance Engine (ESRE), which is expected to contribute $15 million in incremental FY25 revenues, says the bank.

UBS's analysis suggests a robust growth trajectory for Elastic, projecting an 18.7% growth rate for FY25, surpassing the consensus estimate of 17.3%. This optimism is supported by customer feedback indicating substantial investment in Elastic's AI capabilities, with spending expected to grow by 15% this year.

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The investment bank also points to several key growth drivers for Elastic. The company's incumbency in the market offers a competitive edge, particularly against pureplay vector databases. Elastic's hybrid search model and its solid partner growth outlook for 2024, ranging from 20-30%, further reinforce this positive view.

Additionally, Elastic is said to be poised to benefit from displacing competitors like Splunk (NASDAQ:SPLK), with early reports of successful migrations and potential cost advantages. While UBS notes that broader adoption of Elastic's Observability and Security suite has yet to be fully realized, "overall checks came back positive."

With expanding free cash flow margins and underappreciated revenue growth, UBS believes Elastic NV presents a compelling investment opportunity that the current market valuation does not fully capture.

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