2 standout software stocks to buy during bear markets

Despite concerns that artificial intelligence (AI) spending is eating into enterprise software budgets, Citi’s bullish outlook is based on several promising catalysts for software stocks. These include potential growth in IT budgets, a more favorable interest rate environment, and the potential for positive estimate revisions, which make MongoDB and Elastic NV attractive stock picks at current levels. With this optimism in mind, let’s take a closer look at these two stocks.

Stock Software #1: MongoDB

With a market capitalization of approximately $18.3 billion, New York-based MongoDB, Inc. (MDB) enables 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, the MongoDB database platform has been downloaded hundreds of millions of times and serves tens of thousands of customers in more than 100 countries.

The software company’s shares are down 36.7% over the past 52 weeks and 36.4% YTD. The stock is down more than 50% from its 52-week high of $509.62 reached in February.

From a valuation perspective, MDB shares are valued at 10.64 times sales, which is significantly lower than the five-year average of 23.41 times.

On May 30, MongoDB announced its fiscal 2025 first-quarter financial results, which beat Wall Street forecasts in both revenue and earnings. Total revenue of $450.6 million was up 22.3% year over year and beat estimates by 2.4%. The company saw an impressive 23% year-over-year increase in subscription revenue. MDB also earned $0.51 per share on an adjusted basis, crushing forecasts by a solid 36.5% margin.

As of April 30, MongoDB maintained a strong financial position, with $2.1 billion in liquid assets. The company also reported healthy free cash flow of $61 million, representing a significant increase from $51.8 million recorded in the prior year. During the quarter, MongoDB strengthened its AI capabilities and entered into significant partnerships, most notably with Bendigo and Adelaide Bank.

Reflecting on the Q1 results, CEO Dev Ittycheria said, “Looking ahead, we remain incredibly excited about our large market opportunity, the potential to grow share, and become the standard for more of our customers. We also see a huge opportunity to capture more legacy workloads as AI has become a catalyst for modernizing these applications. MongoDB’s document-driven architecture is particularly well-suited to the variety and scale of data that AI-driven applications require.”

For Q2, management is forecasting revenue in the range of $460 million to $464 million, while adjusted EPS is expected to be in the range of $0.46 to $0.49. Looking ahead to fiscal 2025, the company is forecasting revenue in the range of $1.88 billion to $1.90 billion. Additionally, adjusted EPS is expected to be in the range of $2.15 to $2.30.

Analysts following MongoDB predict the company’s GAAP loss will shrink 25.8% in fiscal 2025 and shrink another 12.7% in fiscal 2026.

Overall, MDB stock has a consensus rating of “Strong Buy.” Of the 30 analysts offering recommendations for the stock, 21 recommend a “Strong Buy,” three suggest a “Moderate Buy,” five recommend a “Hold,” and the rest give it 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 almost 92%.

Stock Software #2: Elastic NV

Mountain View-based AI search company Elastic NV (ESTC) enables users to find answers in real time at scale using all their data. Elastic NV’s cutting-edge search, observability, and security solutions are built on the robust Elastic Search AI platform trusted by thousands of companies, including more than half of the Fortune 500. The company currently has a market capitalization of $11.6 billion.

Elastic NV shares are up 78.1% over the past 52 weeks, far outpacing the broader S&P 500 Index ($SPX)’s return of about 22.9% over the same period.

However, shares are up just 1.3% year-to-date. Furthermore, ESTC is down nearly 16.3% from its 52-week high of $136.06 set in February.

At 9.21 times sales, the stock is trading at a discount to its five-year average of 12.86 times.

Following better-than-expected fiscal fourth-quarter 2024 financial results announced after the close on May 30, ESTC rose 11.7% in the next trading session. The company delivered solid results, with total revenue reaching $335 million, up 20% year-over-year. Cloud revenue rose to $148 million, up 32% year-over-year. In addition, adjusted earnings per share of $0.21 beat Wall Street forecasts by 5.6%.

During the quarter, Elastic reported a growing customer base of more than 1,330 customers with annual contract value (ACV) greater than $100,000, up from approximately 1,160 in the fourth quarter of fiscal 2023. The total number of subscription customers also increased to approximately 21,000, up from approximately 20,200 in the final quarter of fiscal 2023.

Cash flow from operations was $61 million and adjusted free cash flow was $60 million, up approximately 17% sequentially. As of April 30, the company had approximately $1.1 billion in cash, cash equivalents and marketable securities, underscoring its strong liquidity position.

Commenting on the Q4 results, 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 reinforce our confidence in the continued strength of our business.”

For the first quarter of fiscal 2025, the company is forecasting total revenue in the range of $343 million to $345 million, reflecting 17% year-over-year growth at midyear, while adjusted EPS is expected to be in the range of $0.24 to $0.26. For the full year, fiscal management is forecasting total revenue in the range of $1.47 billion to $1.48 billion, representing 16% year-over-year growth at midyear. Adjusted EPS is expected to be in the range of $1.35 billion to $1.47 billion in fiscal 2025.

Analysts following Elastic NV forecast the company’s GAAP loss will shrink 8.2% in fiscal 2025 and shrink another 18.6% in fiscal 2026.

ESTC shares have an overall rating of “Moderate Buy.” Of the 23 analysts covering the stock, 14 recommend a “Strong Buy,” one advises a “Moderate Buy,” and the remaining eight assign a “Hold” rating.

The average analyst price target of $127.15 indicates a potential upside of 11.2% from current price levels. The Street-high price target of $155 suggests the stock could rise as much as 35.6%.

On the date of publication, Anushka Mukherjee did not hold (directly or indirectly) a position in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For further information, please refer to Barchart’s Disclosure Policy here.