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As businesses race to digitize their operations, the demand for software solutions that elevate efficiency, bolster security, and enhance productivity is surging. The global enterprise software market is poised for significant growth, with revenues projected to reach $292 billion this year, and grow at a 6.6% compound annual growth rate (CAGR) through 2028.
However, the first half of 2024 has been a rollercoaster for enterprise software, marked by several big names reporting weaker results and lowering guidance, partly due to evolving IT budgets and interest rate dynamics. But despite this rocky start, analysts at Citi have pinpointed two software companies, MongoDB, Inc. (MDB) and Elastic N.V. (ESTC), as its top picks to buy on the dip.
Despite concerns that artificial intelligence (AI) spending is eating away at enterprise software budgets, Citi’s bullish outlook is based on several promising catalysts for software stocks. These include a potential increase in IT budgets, a more favorable interest rate environment, and the potential for positive estimate revisions, making MongoDB and Elastic N.V. compelling stock picks at current levels. Given the optimism, here’s a closer look at these two stocks.
Software Stock #1: MongoDB
With a market cap of about $18.3 billion, New York-based MongoDB, Inc. (MDB) empowers innovators to transform industries through the power of software and data. The company offers a unified experience, with integrated services to meet the diverse needs of modern applications. Since 2007, MongoDB's database platform has been downloaded hundreds of millions of times, and serves tens of thousands of customers across over 100 countries.
Shares of this software company have fallen 36.7% over the past 52 weeks and 36.4% on a YTD basis. Plus, the stock has slipped more than 50% from its 52-week high of $509.62, achieved in February.
From a valuation standpoint, MDB stock trades at 10.64 times sales, much lower than its own five-year average of 23.41x.
On May 30, MongoDB announced its fiscal 2025 Q1 earnings results, which blew past Wall Street’s projections on both the top and bottom lines. Total revenue of $450.6 million jumped 22.3% annually, and outpaced estimates by 2.4%. The company reported an impressive 23% year-over-year growth in revenue from subscriptions. Plus, MDB earned $0.51 per share on an adjusted basis, smashing projections by a solid 36.5% margin.
As of April 30, MongoDB held a strong financial position, with $2.1 billion in liquid assets. The company also reported a healthy free cash flow of $61 million, reflecting notable growth from the $51.8 million recorded the previous year. During the quarter, MongoDB bolstered its AI capabilities and forged significant partnerships, most notably with Bendigo and Adelaide Bank.
Reflecting on the Q1 performance, CEO Dev Ittycheria said, “As we look ahead, we continue to be incredibly excited by our large market opportunity, the potential to increase share, and become a standard within more of our customers. We also see a tremendous opportunity to win more legacy workloads, as AI has now become a catalyst to modernize these applications. MongoDB's document-based architecture is particularly well-suited for the variety and scale of data required by AI-powered applications.”
For Q2, management projects revenue to range between $460 million and $464 million, while adjusted EPS is forecasted to land somewhere between $0.46 and $0.49. Looking forward to fiscal 2025, the company forecasts revenue to be within the range of $1.88 billion and $1.90 billion. Also, adjusted EPS is expected to range between $2.15 and $2.30.
Analysts tracking MongoDB expect the company’s GAAP loss to narrow 25.8% in fiscal 2025 and shrink another 12.7% in fiscal 2026.
Overall, MDB stock has a consensus “Strong Buy” rating. Out of the 30 analysts offering recommendations for the stock, 21 recommend a “Strong Buy,” three suggest a “Moderate Buy,” five advise a “Hold,” and the remaining one gives a “Strong Sell” rating.
The average analyst price target of $331.79 indicates a potential upside of 27.4% from current price levels. However, the Street-high price target of $500 suggests an impressive upside potential of nearly 92%.
Software Stock #2: Elastic N.V.
Headquartered in Mountain View, search AI company Elastic N.V. (ESTC) empowers users to find real-time answers at scale using all its data. Elastic N.V.’s cutting-edge solutions for search, observability, and security are built on the robust Elastic Search AI Platform, trusted by thousands of businesses, including over half of the Fortune 500. The company’s market cap currently stands at $11.6 billion.
Shares of Elastic N.V. have rallied 78.1% over the past 52 weeks, easily outpacing the broader S&P 500 Index’s ($SPX) return of about 22.9% during the same time frame.
However, on a YTD basis, the stock has climbed only 1.3%. Plus, ESTC is down nearly 16.3% from its 52-week high of $136.06, recorded in February.
Priced at 9.21 times sales, the stock trades at a discount to its own five-year average of 12.86x.
Following its better-than-expected fiscal 2024 Q4 earnings results, reported after the close on May 30, ESTC soared 11.7% in the subsequent trading session. The company delivered a strong performance, with total revenue reaching $335 million, up 20% annually. Cloud revenue surged to $148 million, marking a 32% annual improvement. Plus, adjusted EPS of $0.21 topped Wall Street’s forecasts by 5.6%.
During the quarter, Elastic reported a growing customer base, with over 1,330 customers who have an Annual Contract Value (ACV) exceeding $100,000, up from roughly 1,160 in Q4 of fiscal 2023. The total subscription customer count also increased to approximately 21,000, compared to around 20,200 in the final quarter of fiscal 2023.
Operating cash flow hit $61 million and adjusted free cash flow was $60 million, up about 17% sequentially. As of April 30, the company held approximately $1.1 billion in cash, cash equivalents, and marketable securities, underscoring its strong liquidity position.
Commenting on the Q4 performance, CEO Ash Kulkarni said, “Elastic delivered another strong quarter and a great finish to the fiscal year. The strong and sustained adoption we are seeing for our Generative AI capabilities and our continued ability to differentiate and win in search, security and observability with our Search AI Platform reinforces our confidence in the enduring strength of our business.”
For Q1 of fiscal year 2025, the company anticipates total revenue to range between $343 million and $345 million, reflecting 17% year-over-year growth at the midpoint, while adjusted EPS is projected to land between $0.24 and $0.26. For the full fiscal year, management forecasts total revenue in the range of $1.47 billion to $1.48 billion, representing 16% annual growth at the midpoint. Adjusted EPS is expected to land between $1.35 and $1.47 for fiscal 2025.
Analysts tracking Elastic N.V. project the company’s GAAP loss to narrow 8.2% in fiscal 2025 and shrink another 18.6% in fiscal 2026.
ESTC stock has a consensus “Moderate Buy” rating overall. Of the 23 analysts covering the stock, 14 recommend a “Strong Buy,” one advises a “Moderate Buy,” and the remaining eight give a “Hold” rating.
The average analyst price target of $127.15 indicates a potential upside of 11.2% from the current price levels. The Street-high price target of $155 suggests that the stock could rally as much as 35.6%.
On the date of publication, Anushka Mukherjee did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
