Why Elastic Stock is Crashing Today

Elastic (ESTC -27.43%) stock drops on friday. The company’s stock price was down 28.7% as of 3:05 p.m. ET, according to data from S&P Global Market Intelligence.

After the market closed yesterday, Elastic released results for the first quarter of its current fiscal year (which ended July 31). The enterprise search software company actually posted quarterly results that came in well ahead of Wall Street targets, but its forward guidance is causing panic.

Investors are looking beyond Elastic’s Q1 struggles

Elastic posted non-GAAP (adjusted) earnings per share of $0.35 in Q1, beating the average analyst estimate for earnings per share of $0.25. Revenue also beat Wall Street’s target, with sales of $347 million beating the average target by $2.39 million. Sales were up 18.1% year-over-year in the period, and adjusted earnings per share were up 40%. But the momentum appears to be on the wane as the year progresses, with management anticipating sales to be lower than originally forecast.

Wall Street hates Elastic’s guidance revision

Elastic now guides sales to be between $1.436 billion and $1.444 billion this fiscal year. If the company were to reach the midpoint of this range, it would mean annual growth of 14%. Before yesterday’s update, Elastic’s most recent guidance suggested the business would post revenue between $1.468 billion and $1.48 billion for the fiscal year — good for about 16% growth. The average analyst estimate expected the business to reach the upper end of the guidance range.

Following the Q1 report, Bank of America issued a note downgrading Elastic and lowering its one-year price target from $140 per share to $90 per share. BofA analysts pointed to higher risks of disruption and weak demand in international markets as reasons for the downward revisions.

On the other hand, management is recommending an adjusted operating margin of approximately 12.5% ​​and expects adjusted earnings per diluted share to be between $1.52 and $1.56. The guidance range actually came in significantly better than Wall Street’s average target for earnings per share of $1.42. Risk-tolerant investors may want to take a closer look at the stock after today’s big pullback.