Under-the-Radar Australian Stock Up 62%, Now What?

Boasting an impressive 62% gain in its stock price this year, Atlassian has become the darling of investors with an affinity for enterprise software. The Ozzie company seems to be back in vogue, buoyed by rejuvenated revenue growth.

So, is there more juice to squeeze out of this tasty stock?

260,000 Customers & Counting

Atlassian made its name through its flagship products, Jira and Confluence, tools that disrupted project management and collaborative document creation, respectively.

As of last quarter, the firm had amassed over 260,000 customers, covering a gamut of cloud, enterprise, and IT services. The revenue mix breaks down as follows:

• Cloud operations accounts for 60% of revenue
• Data center raking in 25%.

The company’s server and marketplace and services operations both feature in the single-digit percentages.

Atlassian is on a fast-track mission to transition server-based clients to its cloud and data center ecosystems, with a view to shuttering its server business by early next year and that’s had a knock-on effect.

Profits, What Profits?

With the stock up so much this year, the question arises now whether it is still a buy. Astonishingly, Atlassian has followed 29.4% growth in 2021 with 34.2% growth in 2022 and 26.1% growth in 2023. Margins have fallen slightly over that time from 84.1% to 82.3%, not terrible by any means.

More concerning is the flip of operating income from positive to negative in the past year. In 2021, the company reported EBIT of $141 million which fell to $70 million last year and went negative to -$248 million this year.

Investments in cloud infrastructure and new product development are the culprit. Nevertheless, analysts remain fairly upbeat and have a $224 price target on the stock still. The highest price target is $420 per share, which would correspond to a gain of over 100% if realized.

Time to Buy?

Atlassian has its fair share of financial burdens to cause investors worry, including a 15x price-to-sales ratio. When we ran a cash flow calculation we arrived at a fair value of $172 per share, suggesting downside risk of 16%.

It also has a staggering debt-to-equity ratio of 5.3x. Combined with a hefty enterprise value of $52 billion, Atlassian doesn’t exactly appear to be a bargain.

There’s no doubt that Atlassian has been on an upward trajectory. However, the company’s steep valuation multiples, compressing margins, and downside risk on a discounted cash flow forecast basis throw up enough concerns to suggest it’s best to add this to the watchlist for now, and watch from the sidelines until the price becomes more compelling. This is a great company, growing the top line rapidly but the bottom line matters too.