Fast Growth Stock To Pop 230%?

Having sold off by nearly 65 percent this year, project management and collaboration software provider Atlassian (NASDAQ:TEAM) has become a potentially attractive buy for investors hunting out bargains among high-growth tech stocks.

One of the key arguments behind Atlassian is its rapid revenue growth. In Q3, the company reported a year-over-year revenue increase of 31 percent. Another encouraging factor in the report was a considerable paring of net losses from over $400 million last year to just $13.7 million this year. Although the company missed analyst estimates for the quarter, its performance on a year-over-year basis was still impressive.

While Atlassian didn’t meet analyst targets for new subscribers, it did still gain 6,550 paid customers. This brought the total number to 249,173. As recently as 2019, Atlassian’s customer count was just 152,000. Assuming the company can continue adding large numbers of subscribers per quarter, its long-term prospects could be quite positive.

Atlassian is also a market leader in a rapidly growing business software category. The market for project management software is expected to grow to $9.8 billion by 2027. Today, North America is the largest geographical market for project management software.

Over the next several years, however, digital transformation in Latin America, the Middle East and Asia will likely create new growth opportunities. As a five-time Gartner market leader, Atlassian is uniquely positioned to take advantage of this growing market.

Another reason to look at Atlassian is that the stock is trading well below its recent price-to-sales average. Today, TEAM trades at about 12 times sales, the lowest multiple since 2017. Given that Atlassian still appears to have ample room for growth, the current selloff could be a rare opportunity to buy in at unusually low valuations.

Atlassian’s extremely high gross margin is also a reason to look at this company on a long-term basis. Even in today’s challenging business climate, Atlassian’s gross margins exceed 80 percent. With revenues still rising, these gross margins will likely support eventual profitability. Once that occurs, Atlassian could be in a good position to generate substantial free cash flows from its ongoing subscriber revenues.

The median target price for TEAM in the next 12 months is $183.50. This would give the stock a single-year upside of 35.1 percent against its current price of $137.55. TEAM holds a consensus buy rating, with 15 of the 25 analysts covering the stock recommending it as a buy.

Over the next five years, analysts project Atlassian’s compounded annual growth rate to be 20 percent. This rate of growth would likely bring about substantial gains in share prices, provided the company can achieve sustainable profitability.

Next year alone, the company is expected to grow by over 40 percent, after which a high but somewhat more moderate growth trend is expected to set in.

When considering how high TEAM could eventually go, it’s important to recognize the stock’s potential risk factors. First and foremost among these is the company’s debt level. At more than twice its equity, Atlassian carries a worrying amount of debt. If Atlassian continues to fund its business through borrowing in today’s high interest rate environment, the company’s obligations could eventually become a severe impediment to more productive spending on growth.

Atlassian could also be vulnerable to competitive risks as the collaboration and project management software spaces heat up. The company’s business model is heavily dependent on large numbers of customers purchasing and regularly renewing subscriptions.

If competitors successfully undercut Atlassian on price, the company could see its recurring revenues suffer. Atlassian has already seen a slowdown in conversions from its free version to paid services in recent months. If this trend continues, the company could have difficulty meeting its revenue forecasts.

A final major risk consideration is the delaying effect that macroeconomic conditions could have on Atlassian’s growth. As the Q3 earnings report shows, persistent economic instability has the ability to somewhat hamper the company. While the current economic climate is likely temporary, a probable recession in 2023 could exert more downward pressure on TEAM before the stock can begin to rise again.

Despite its risks, Atlassian appears to be a promising option for high-growth investors. The company’s rapid revenue growth over the past year suggests that it still has plenty of room to run. Atlassian also plans to pursue cost-cutting measures to further narrow its losses and respond to a potentially slower period while the economy self-corrects.

The most optimistic current price target for TEAM is $460, more than 230 percent above the stock’s current price. While this number is extremely unlikely in the next 12 months, it may be a decent estimate for where the stock could go in the next 3-5 years.

Provided Atlassian achieves reliable profitability and continues to grow its revenues at double-digit rates as predicted, it seems reasonable to expect the stock to double or even triple on a relatively short timeline.

With that said, investors should keep in mind that Atlassian could stagnate or even sink a bit further going into 2023 if a recession begins. As noted above, a recession could have a delaying effect on the stock’s recovery. As such, the stock is likely best for medium to long-term buying strategies.

It’s also important to note that TEAM isn’t for every investor. As an unprofitable company operating with a high level of debt, Atlassian depends on rapid growth prospects to justify its price. As such, the stock likely isn’t suitable for conservative investors looking for slow, low-volatility gains. If you’re comfortable with more risk, though, TEAM is a stock that could produce outsized returns over the next few years.