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As the next wave of the artificial intelligence (AI) revolution reshapes the software industry, two stocks, Snowflake (SNOW) and Elastic (ESTC), have emerged as compelling investment opportunities. Both stocks were recently upgraded by Wedbush, with price target hikes reflecting the firm’s bullish outlook on their AI-driven potential. Wedbush analyst Dan Ives argues that the “AI Software era is now here,” identifying generative AI as a pivotal catalyst that will propel software stocks to new heights.
“Now [it’s] time for the broader software space to get in on the AI Party as we believe the use cases are exploding, enterprise consumption phase is ahead of us beginning in 2025, launch of LLM models across the board, and the true adoption of generative AI will be a major catalyst for the software sector and key players to benefit from this once in a generation 4th Industrial Revolution set to benefit the tech space, ” Ives wrote in a note to clients.
Wedbush’s upgrades come with a clear message: the AI revolution is no longer a distant future - it’s happening now, and the software industry is set to reap significant rewards. The firm believes that SNOW and ESTC are among the best-positioned players to thrive in this environment. With that, let’s have a closer look at these stocks.
The Case For Snowflake Stock
With a market cap of $58.5 billion, Snowflake Inc. (SNOW) offers a cloud-based data platform to a variety of organizations both in the U.S. and internationally. Its platform offers Data Cloud, enabling customers to unify their data into a single source of truth to generate meaningful business insights, develop data-driven applications, as well as share data and data products. Additionally, it utilizes AI to address business challenges.
Shares of the cloud-based data company have struggled this year, dropping about 12% on a year-to-date basis. This underperformance followed disappointing FY25 guidance at the start of the year and the unexpected retirement of CEO Frank Slootman.
Wedbush’s View on SNOW Stock
On Nov. 25, SNOW gained over 2% after Wedbush upgraded the stock to “Outperform” from “Neutral” with a $190 price target. The firm noted that Snowflake is positioned in the “sweet spot” to capitalize on AI use cases over the next 12 to 18 months.
Recent News for SNOW Stock
On Nov. 20, Snowflake and Anthropic entered into a multi-year strategic partnership to offer Anthropic’s leading Claude models to customers in Snowflake Cortex AI. Anthropic’s newest Claude 3.5 Sonnet model will be available within the security and governance frameworks of Snowflake on Amazon Web Services (AWS). In addition, Snowflake’s agentic AI products, such as Snowflake Intelligence and Cortex Analyst, will utilize Claude as one of the primary large language models (LLMs) driving these experiences. Through its partnership with Anthropic, Snowflake has the opportunity to elevate its Cortex AI to the next level, which could spur substantial growth and increased adoption among its existing customer base.
On Nov. 20, Snowflake announced the signing of a definitive agreement to acquire Datavolo, a company built to expedite the creation, management, and observability of multimodal data pipelines for enterprise AI. The acquisition will enhance data engineering on Snowflake's platform by providing simple, scalable, and cost-effective unstructured data ingestion within the AI Data Cloud.
“Simplicity and time-to-value are core to Snowflake’s ethos. By bringing Datavolo into the Snowflake fold, we are expanding how much of the data lifecycle Snowflake captures - unlocking both simplicity and cost savings for our customers, without any sacrifice to data extensibility,” said Sridhar Ramaswamy, CEO of Snowflake. “We are excited to have the Datavolo team join Snowflake as we accelerate what is the best platform for enterprise data - unstructured and structured, batch and streaming - and dedicated to the success of the open source community.”
Snowflake Pops on Upbeat Q3 Results & FY25 Guidance Hike
On Nov. 21, Snowflake shares jumped more than 32% after the cloud data storage and analytics company posted stronger-than-expected Q3 results and raised its full-year product revenue guidance.
The company’s total revenue grew 28.3% year-over-year to $942.1 million, beating Wall Street’s expectations by $43.63 million. Management views Product Revenue, which comprised 96% of total revenue in Q3, as the primary indicator of growth. This figure rose 29% year-over-year to $900.3 million, surpassing the company’s own guidance of up to $855 million, fueled by customer acquisition and high customer net retention rates. Notably, the company increased its total customer count by 4% quarter-over-quarter to a record of 10,618.
Turning to net revenue retention, this metric is crucial for quantifying a software company’s ability to monetize its existing customer base and upsell premium products. SNOW reported a net revenue retention rate of 127%, an impressive figure for a software company, indicating robust adoption of Snowflake’s platform and AI functionality. Its adjusted earnings per share stood at $0.20, beating the consensus estimate by $0.05.
“Our AI feature family Snowflake Cortex is showing significant adoption and we improved our go-to-market motion across the board and it's having a huge impact on new product adoption. We are firing on all cylinders. The credit goes to the entire Snowflake team and I'm very encouraged by our progress showing up so well in the numbers,” CEO Sridhar Ramaswamy stated during the Q3 earnings call.
Meanwhile, Remaining Performance Obligations (RPO), which represent contracted future revenue not yet recognized, totaled $5.7 billion, with year-over-year growth accelerating to 55%. This figure serves as an indicator of future revenue growth. When RPO expands significantly faster than current revenue growth, it increases the likelihood of accelerated revenue growth in upcoming quarters.
When it comes to other key business metrics, the number of customers with trailing 12-month product revenue exceeding $1 million stood at 542, up 24.3% year-over-year, while the number of Forbes Global 2000 customers came in at 754, a 7.9% increase from the previous year.
Snowflake generated $78.2 million in free cash flow, up 33% from the prior quarter but down 23% on a year-over-year basis, primarily due to higher capital expenditures and software development costs. Snowflake investors should anticipate that the company will continue to make significant investments in AI in the coming quarters to stay competitive and push Product Revenue towards its target of $10 billion by the end of 2028, which is likely to impact its margins.
During the earnings call, CFO Mike Scarpelli noted on profitability, “Non-GAAP product gross margin of 76% stabilized sequentially. Non-GAAP operating margin of 6% exceeded our guidance, benefiting from revenue outperformance, efficiencies in R&D, and expenses related to our new Bay Area office space being pushed to Q4. Our non-GAAP adjusted free cash flow margin was 9%, driven by strong bookings. We continue to see approximately 80% of our customers paying us annually in advance.”
Snowflake maintained a solid balance sheet, ending the quarter with $4.16 billion in cash and short-term investments and a debt-to-equity ratio of 0.89x. It’s also worth mentioning that the company repurchased $1.9 billion of its stock year-to-date, with an additional $2 billion authorized for repurchase through March 2027.
Looking ahead, management raised FY25 product revenue guidance to $3.43 billion from the previously projected $3.36 billion, representing 29% growth year-over-year. Also, management boosted operating margin guidance from 3% in the previous quarter to 5%.
SNOW Valuation and Analysts’ Estimates
Analysts tracking Snowflake predict a 28.59% year-over-year drop in its non-GAAP EPS to $0.70 for fiscal 2025. At the same time, Wall Street expects SNOW’s FY25 revenue to grow 27.78% year-over-year to $3.59 billion.
In terms of valuation, Snowflake’s current price-to-sales ratio (TTM) is 17.03x, which is not considered high for large-scale platform businesses that achieve double-digit annual revenue growth. Moreover, the multiple is well below its five-year average of 39.67x.
What Do Analysts Expect For SNOW Stock?
Analysts have deemed Snowflake stock a “Moderate Buy,” with an average price target of $184.56, indicating an upside potential of 5.6% from Friday’s closing price. Out of the 41 analysts covering the stock, 26 recommend a “Strong Buy,” three advise a “Moderate Buy,” 10 suggest a “Hold,” and the remaining two give a “Strong Sell” rating.
The Case For Elastic N.V. Stock
Elastic N.V. (ESTC) is a search AI company that empowers users to securely leverage search-powered AI to obtain real-time answers using all their data, at scale. Its offerings for search, observability, and security are based on the Elastic Search AI Platform, a development platform utilized by thousands of companies, including over 50% of the Fortune 500. ESTC’s market cap currently stands at $11.3 billion.
Shares of the AI search company have lost 2.9% on a year-to-date basis. However, the stock has risen about 35% over the past month, primarily due to its strong FQ2 report.
Wedbush’s View on ESTC Stock
On Nov. 25, ESTC rose more than 3% after Wedbush upgraded the stock to “Outperform” from “Neutral” with a $135 price target. Wedbush analyst Dan Ives highlighted that Elastic is likely to benefit from increasing AI demand for its platform approach.
Recent News for ESTC Stock
On Nov. 25, Elastic announced that it was enhancing its relationship with AWS by utilizing AWS’s latest generative AI services. As part of this partnership, Elastic is offering LLM observability support for Amazon Bedrock within Elastic Observability. The new integration provides Site Reliability Engineers (SREs) with detailed insights into the performance and usage of their Amazon Bedrock LLMs. SREs can now use Elastic Observability to monitor invocations, errors, and latency metrics.
“As LLM-based applications are growing, it’s essential for developers and SREs to be able to monitor, optimize, and troubleshoot how they perform,” said Santosh Krishnan, general manager of Security and Observability Solutions at Elastic. “Today’s integration simplifies the collection of metrics and logs from Amazon Bedrock, in turn streamlining the process of gaining valuable and actionable insights.”
Elastic Surges on Solid FQ2 Results & FY25 Guidance Raise
On Nov. 22, Elastic surged over 14% after reporting stronger-than-expected FQ2 results and boosting its full-year guidance.
Elastic reported a strong second quarter, bolstered by strong sales execution and customer commitments, and surpassed expectations in all revenue and profitability metrics. Total revenue advanced 17.4% year-over-year to $365 million, ahead of Wall Street’s expectations of $354.3 million. Its cloud revenue increased even more rapidly, growing 25% year-over-year to $169 million. Additionally, the net revenue retention rate was 112%, indicating that the average customer within the install base is increasing its spending on the platform by 12%. The company has effectively recovered from previous disruptions through strategic sales segmentation.
Customer metrics also demonstrated positive trends during the quarter. The total number of customers with an Annual Contract Value (ACV) exceeding $100,000 was 1,420, up from 1,370 in FQ1 FY25 and 1,220 in FQ2 FY24. This growth was partly fueled by new generative AI capabilities that are stimulating demand for multiple products from customers attracted by Elastic’s automation capabilities.
According to McKinsey, 72% of organizations adopted generative AI in one or more functions in early 2024, a trend that supports Elastic's business and enhances its potential to expand its customer base. Notably, Elastic has carved out a niche in AI training, assisting companies in identifying the optimal data for training generative AI. During the earnings call, management noted that new customer commitments involving GenAI nearly doubled in dollar volume compared to FQ1, with three of the contracts ESTC signed exceeding $1 million in annual contract value.
“In Q2 we saw strong customer commitments with key wins across all our solution areas, with continued momentum in GenAI and platform consolidation,” said Elastic CEO Ash Kulkarni. “Our clear product differentiation and our relentless pace of innovation is helping us become a natural choice for customers building GenAI applications.”
The company has also introduced its new Elastic AI ecosystem, aimed at facilitating enterprise adoption of AI, and is already collaborating with major hyperscaler providers such as Amazon’s AWS, Alibaba Cloud, Anthropic, Confluent, OpenAI, Nvidia, and Microsoft, among others.
CEO Kulkarni said, “We have built a comprehensive set of integrations with our Elasticsearch vector database to help developers speed up the time to develop GenAI applications.”
In terms of profitability, Elastic’s Non-GAAP operating margin rose to 17.6% in FQ2, marking a year-over-year expansion of 430 basis points and significantly exceeding the company’s guidance of approximately 13%. The margin expansion resulted from robust revenue outperformance combined with ongoing spending discipline. Its Non-GAAP EPS stood at $0.59, beating expectations by $0.21. It is also important to note that Elastic has a strong balance sheet, ending the quarter with approximately $630 million of net cash.
Buoyed by the strong FQ2 performance, management raised the FY25 revenue forecast to a range between $1.45 billion and $1.46 billion, up from the previous guidance of $1.44 billion. Also, non-GAAP EPS is expected to be between $1.68 and $1.72, up from the prior guidance of $1.52 to $1.56. In addition, ESTC guided for a 13.5% non-GAAP operating margin, which is 50 basis points higher than its outlook from the previous quarter.
ESTC Valuation and Analysts’ Estimates
According to Wall Street estimates, ESTC is expected to post a solid 44.61% year-over-year non-GAAP EPS growth to $1.72 in fiscal 2025, while revenue is projected to grow 14.87% year-over-year to $1.46 billion.
In terms of valuation, the stock’s forward EV/Sales multiple stands at 7.37x, which is above the sector median of 3.22x but below its five-year average of 10.45x. I believe Elastic stock is reasonably priced at current levels, given its position at the intersection of AI and enterprise.
What Do Analysts Expect For ESTC Stock?
Analysts have a consensus rating of “Strong Buy” on Elastic stock. Out of the 24 analysts in coverage, 17 recommend a “Strong Buy,” one suggests a “Moderate Buy,” and six assign a “Hold” rating. The mean target price for ESTC stock is $130.38, which is about 19% above Friday’s closing price.
