Shares of software project management solutions provider Atlassian (TEAM) has been one of the many less-than-profitable growth companies licking its wounds amid the latest tech sell-off.
Shares of TEAM nearly got cut in half from peak to trough before bouncing back as a part of last week’s relief rally.
Atlassian is a very high-quality growth company with a wider moat than most other growth “story” stocks that have been crushed as a part of this bear market.
Although analysts have lowered their price targets in recent weeks, the long-term fundamentals remain intact, and the valuation reset is likely overdone. I am bullish on TEAM stock.
Premium for Quality Growth
At over 30 times sales, TEAM is by no means a cheap stock, even with the recent crash now in the rear-view mirror.
With such a powerful suite of tools for software developers, though, Atlassian has the ability to upsell its customers with new products and innovations.
Atlassian’s many products are enviable and unmatched within the realm of software development. Like most other software companies, the firm has made a nice push into the cloud, an effort that could pay off in a few years.
However, such cloud transitions can take a toll on a firm’s operating margins. Atlassian’s numbers could stand to look a whole lot worse than they actually are, and that could exacerbate the next leg of this growth-focused sell-off if we are in for another one.
Given how well established the Atlassian brand is within the development community, though, the firm can weather any such margin slump. The company’s sales and marketing expenses are in a good spot.
Further, Atlassian also has a decent amount of financial flexibility to go aggressive on R&D initiatives, while also keeping an eye open for potential acquisitions within the space.
Atlassian isn’t a serial acquirer like Salesforce (CRM), but it is known to make a deal or two whenever where there’s long-term value-creation to be had.
With such strong network efforts and a brilliant management team, any small firms are likely to be in better hands under the Atlassian umbrella.
Atlassian Firing on All Cylinders
In the second quarter, Atlassian delivered a nice beat and guidance raise. The cloud progress, in particular, was outstanding.
Revenue rose 37% year-over-year, while subscriptions soared 64%. As one of the major beneficiaries of the ongoing digital transformation, I find it will be difficult to stop Atlassian’s freight-train-like momentum as the cloud flexes its muscles.
Although Atlassian isn’t yet profitable according to IFRS (Atlassian is an Australian company), the firm has many years of incredible growth ahead.
Wall Street’s Take
According to TipRanks’ rating consensus, TEAM stock comes in as a Moderate Buy. Out of 14 analyst ratings, there are nine Buy recommendations and five Hold recommendations.
The average Atlassian price target is $414.71, implying 41.3% upside potential. Analyst price targets range from a low of $330 per share to a high of $520 per share.
Bottom Line on TEAM Stock
Atlassian is a software-planning kingpin with a lot going for it, other than the stock, which continues to fade at the hands of higher interest rates.
While the environment has been unkind to high-growth firms like Atlassian, count the firm as one of the high-quality growers that will eventually rise out of the rubble and continue marching forward, even with winds facing its head.
The only knock against the company is the hefty price-to-sales multiple. Given recent cloud strength and impressive growth, I think such a premium price tag is justified. Just don’t expect Wall Street to be too forgiving if last week’s relief rally is actually a bear market bounce to be surrendered.
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