Investment ThesisAtlassian Corp. (NASDAQ:TEAM) smashed Q3 earnings despite high expectations and, despite being relatively expensive, has room to grow. The business continues to develop and diversify. The financials and the outlook are solid. And the Board is shareholder friendly: it authorized a new share repurchase program for $1.5 bn once the 2023 authorized $1.0 bn is completed. The arrival of a new Chief Revenue Officer in January 2025 Brian Duffy from SAP SE (ETR:SAPG) (SAP), a competitor, where he was President of Cloud, could additionally unlock real potential in the cloud segment of Atlassian (NASDAQ:TEAM).
The stock already did a 7x since IPO in 2015 and, despite impressive progress this year, is down -10% on a YTD basis. This potentially shows the market waited for earnings to catch up and valuation to cool down - and while the stock remains somewhat expensive, there is a real long-term opportunity.
Business Overview Starting from the recent business highlights, there were several fronts of evolution that preserve the business model's attractiveness. The most exciting product announcement is Rovo because of two letters: AI. Indeed, the company announced this long-awaited SaaS product powered by AI. Rovo is like an AI-powered work colleague aimed to revolutionise corporate organisations. It has features such as search capabilities (including chat for knowledge) and can help with complex and/or repetitive problems within a corporation. Rovo just became available for customers and is a potential growth catalyst that is yet to be included in the financial outlook of the company.
The company also announced Atlassian Focus (a new product line in the ERP segment) as well as the expansion of its flagship Jira offering with additional premium editions. The fact that the number of customers with over $10k in Cloud ARR increased by 17% shows the growing customer retention (and satisfaction) of Atlassian. Not only the customers are happy: Atlassian was recognized on Fortune's 2024 list of Best Workplaces in Technology.
Financials, Outlook and ValuationDiving into the calendar Q3 2024 earnings (fiscal Q1 2025), the company is demonstrating significant growth rates. The overall revenue reached $1.19 bn, up 21% YoY, of which subscription revenue represents $1.12 bn (+33% YoY). Despite a GAAP operating margin of -3% (non-GAAP at 23%), the company generated $80 mn in cash from operations and $74 mn of FCF, further growing the cash pile it is sitting on: cash and cash equivalents totalled $2.3 bn.
The balance sheet is healthy with the large cash pile, long-term assets exceeding long-term liabilities by $500 mn and a current ratio above (1.18). There is no financial trouble in sight. And the outlook gives little reason to believe the opposite. For the calendar Q4 (fiscal Q2 2025), the total revenue is expected to continue rising and hit $1.23-1.24 bn. Both cloud and data center revenue streams are expected to increase by more than 25% each (25.5% and 27.5% respectively).
Revenue is expected to grow from the 12-month revenue of $4.35 bn in June 2024 to a 12-month revenue of $5.1 bn by June 2025, $6.1 bn by June 2026 and $7.3 bn by June 2027. Revenue growth is therefore expected to be around 19-20%, showing an acceleration relative to the 12-month period ending June 2024.
Revenue Estimates of Atlassian Corp. (FinChat)
These impressive double digit growth rates naturally impact the valuation of the tech stock, trading at a significant premium relative to the S&P 500 which has a median 8% earnings growth in the past 10 years.
ValuationAtlassian is trading at a forward PE of 60x: it's an expensive stock relative to the broader market. The S&P 500 trades at a forward PE of 22x. Given Atlassian's revenue growth rate is approximately 3x the one of the S&P 500, one can justify the 3x valuation relative to the index.
But the fact of the matter is that Atlassian is trading more expensive than most tech growth stocks, even more than NVIDIA Corp. (NASDAQ:NVDA) (approximately forward PE 50x) or SalesForce Inc. (NYSE:CRM) (forward PE 30x). We did witness a pause in the stock price this year: -10% YTD despite a 25% rise shows the potential restart of a momentum and acceleration in the stock.
Forward PE Last 5 Years (FinChat)
Furthermore, the valuation beyond the forward 12 months earnings is particularly attractive for a high growth tech stock. At today's stock price and assuming the base case earnings growth trajectory, the stock is valued at around 40x FY28 earnings. The stock has managed to beat EPS expectations in the last four quarters by a beat of 9.29% to 41.87%, demonstrating the company's ability to under promise and over deliver. It is also therefore likely that the real forward valuation ratios are much lower than currently tabled.
While the stock is expensive in the short-term, locking in the current price while earnings continue growing in the next years could potentially be an attractive opportunity for long-term investors with at least a 3+ years horizon.
Risk Factors to the Buy CaseThe primary risk factor is the valuation. Given the expensive valuation, any felt slowdown or adverse news, even of relatively minor consequence, could cause a sharp sell-off. As it is typical for growth stocks (and potential multi-baggers), especially in the tech sector, the stock price appreciation will be bumpy. If the business shows signs of deceleration in the next quarters, or comes in below expectations, the price could rapidly drop. There are mitigants however: the existing products expansion and new GenAI innovations like Rovo could support and even further accelerate the earnings growth by benefitting from real AI tailwinds.
An additional risk is related to the corporate structure desynchronizing from the company's too rapid growth rates: this could cause some loss of oversight from management, lead to inefficiencies and mine the company with new bureaucratic layers. For example, although the newly created role of Chief Revenue Officer has been broadly perceived by the markets as a positive, there is a risk that new departments and redundant positions (typically the CFO is in charge of revenue related matters) could cause internal frictions and slow down innovation. That is an aspect to keep under the radar for the next quarters.
Bottom LineAtlassian Corp. is a formidable tech stock with disruptive innovations in the enterprise software segment. With new AI-based product offerings, high customer retention and high multi-year growth rates, the recent acceleration in earnings and announcement of a new CRO point to potential momentum improvement as we enter 2025. Despite an expensive valuation following a recent stock spike after Q3 earnings, Atlassian is still an attractive investment opportunity for investors with a long-term horizon.
This content was originally published on Gurufocus.com
