We recently compiled a list of the 12 Best Small Cap Tech Stocks to Buy. In this article, we are going to take a look at where Elastic NV (NYSE:ESTC) stands against the best small-cap tech stocks to buy.

US Inflation and the Anticipated Fed Cuts

Inflation in the US may have reached a 3-year low of 2.6% in August, the lowest rate since March 2021, according to a survey of economists by FactSet. Core inflation, excluding food and energy prices, is believed to have remained at 3.2%.

Inflation peaked at a 4-decade high of 9.1% in June 2022 as the economy rebounded rapidly from the pandemic recession. The Fed responded with 11 rate hikes in 2022 and 2023, raising its key rate to a 23-year high and significantly increasing borrowing costs across the economy. The easing of inflation may pave the way for the Fed to start cutting interest rates next week.

AP News reported that Fed officials think that inflation is steadily declining towards their 2% target. Reducing the Fed’s benchmark rate is expected to lower borrowing costs for consumers and businesses. Christopher Waller, a key Fed policymaker, noted that over half of tracked goods and services have seen annual inflation drop below 2.5%.

Craig Johnson, Chief Market Technician at Piper Sandler & Co., and Gene Goldman, Cetera’s CIO, recently came together to discuss the Fed’s interest rate cuts, and stock sector performance.

Gene Goldman expressed that his base case anticipates 3 rate cuts of 25 basis points each, beginning in September. His belief lies in the slowing inflation, a deceleration in economic growth, and the overall resilience of the economy, which he thinks is not as dire as some reports suggest. Goldman noted that while the labor market showed mixed signals, with both positive and negative data, the market’s expectations for deeper rate cuts may be exaggerated. Goldman acknowledged that political uncertainties could also contribute to market fluctuations.

Craig Johnson was also of the opinion that a 25 basis point cut is already anticipated by the market, suggesting that a 50 basis point cut could raise concerns among investors. He believes that a series of 25 basis point cuts would align with their perspective. Craig emphasized the importance of staying calm considering that, historically, October has been a strong month for the markets, with gains observed 86% of the time since 1929.

Johnson acknowledged that while there has been a recent pullback, particularly following the worst week for the markets since March 2023, there has been a rebound with the Nasdaq and S&P showing positive movements. He highlighted the necessity of dissecting the performance of the MAG 7 tech stocks, which he believes are now lagging. Instead, he pointed out that there are promising stocks within the $2 to $10 billion range that demonstrate solid growth potential, both at the top and bottom lines, and appear constructive on the charts.

He noted the Nasdaq’s 0.75% rebound but referred to it as a dead cat bounce, indicating that a more substantial recovery of 8-10% could be on the horizon. He attributed the day’s positive market sentiment to an employment report that exceeded expectations.

Methodology

We used stock screeners to look for companies trading between $1 billion and $10 billion, that’s our definition of small-cap stocks. We sorted our screen by market cap and looked through the top 25 stocks that matched our criteria. We then selected 12 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Elastic NV (NYSE:ESTC)

Market Capitalization as of September 11: $7.41 billion

Number of Hedge Fund Holders: 58

Elastic NV (NYSE:ESTC) is an American-Dutch search and analytics solutions company that builds self-managed and SaaS offerings for search, logging, security, observability, and analytics use cases. Its technology is used by organizations in various industries, including IT, security, and e-commerce, to gain insights from their data through searching, analyzing, and visualizing data at scale.

Recently, the company changed how it organizes the sales team to focus more on larger customers, which caused delays in closing deals, especially in the Americas. Customer budget constraints also slowed down deals in EMEA. However, no deals were lost and most of them are expected to close soon.

Despite these challenges, the company had a strong first quarter of fiscal 2025, with revenue growth of 18% and cloud revenue growth of 30% year-over-year. The total revenue generated in the period was $347.42 million, with $0.35 in earnings per share. It has over 1,370 customers spending ~$100,000. Elastic NV (NYSE:ESTC) is also focusing on GenAI opportunities, which is helping the Search business grow.

Over 1,300 customers are using Elastic Cloud for GenAI, and more than 200 of these are larger customers. It recently launched a new incentive program called Elastic Express Migration to help companies move to the Elasticsearch AI platform quickly and efficiently. This program includes all the necessary migration services and helps companies avoid the costs of using multiple vendors.

58 hedge funds are long in Elastic NV (NYSE:ESTC) with a total of 1,690,700 shares. The highest stake is at $192,587,637 by Tiger Global Management LLC. The company’s recent deals and partnerships demonstrate its ability to meet the evolving needs of its customers and capitalize on the growing demand for AI-driven solutions.

Artisan Global Discovery Fund stated the following regarding Elastic N.V. (NYSE:ESTC) in its Q2 2024 investor letter:

“During the quarter, we initiated new GardenSM positions in Liberty Formula One, Elastic N.V. (NYSE:ESTC) and Onto Innovation. Elastic is a software company that specializes in search and data analysis solutions. Elastic’s search, observability and security solutions are built on the Elastic Search AI Platform, which thousands of companies use, including more than 50% of the Fortune 500. Customers use the software to gain visibility into their data, reduce mean-time-to-resolution and drive actionable outcomes. We believe the company will benefit from the rise of generative artificial intelligence (AI). It provides a differentiated offering due to the combination of a unique pricing model based on consumption, products that handle numerous data types and volumes, and an open architecture environment that offers generative AI development flexibility.”

Overall ESTC ranks 1st on our list of the best small-cap tech stocks to buy. While we acknowledge the potential of ESTC as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than the stocks on our list but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.