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Stock Pick For January: Atlassian (NASDAQ:TEAM)


Full Report / January 05, 2022
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Founded by Australian co-CEOs Mike Cannon-Brookes and Scott Farquhar in 2002, Atlassian (NASDAQ:TEAM) provides software as a service that makes it easier for large teams of software developers to manage projects, especially in software development.

Atlassian (TEAM) Q1 FY2022 Highlights:

  • Revenue: $614 million vs analyst estimates of $585.6 million (4.84% beat)
  • EPS (non-GAAP): $0.46 vs analyst estimates of $0.40 (15.7% beat)
  • Revenue guidance for Q2 2022 is $637.5 million at the midpoint, above analyst estimates of $620.9 million
  • Free cash flow of $59.3 million, down 63.8% from previous quarter
  • Customers: 216,500, down from 236,118 in previous quarter
  • Gross Margin (GAAP): 84%, in line with same quarter last year

Software is eating the world, as Marc Andreessen says, and there is virtually no industry left that has been untouched by it. That in turn drives increasing demand for tools that help software developers do their jobs, whether it is managing software development, monitoring critical cloud infrastructure, or integrating audio and video functionality.

Atlassian’s software platforms such as Jira, Confluence, Trello and Bitbucket, help staff at diverse organisations manage, maintain and develop their technology stacks, as well as drive and track collaboration more generally. For example, Jira Core is a project and task management solution that anyone in an organization can use to plan, track, and report on projects, splitting each task up into multiple steps, and facilitating code review and testing. Meanwhile, Confluence provides a workspace on the cloud for individuals to collaborate on their projects and Bitbucket is used to store and deploy codebase.

Atlassian is somewhat remarkable amongst software companies for its low touch, or self-serve sales process. Although the company now has enterprise advocates to help its larger customers, it operated for many years by relying heavily on word of mouth marketing. With time, its ubiquity has become a strength, as so many technology workers have become accustomed to its products.

Because Atlassian has a number of products, it has a wide array of competitors, even if a few of them offer an equally comprehensive suite. Notable competitors include Microsoft (NASDAQ:MSFT), which owns Github, a competitor to Jira, and Asana (NYSE:ASAN) which is arguably a competitor to Confluence and Trello.

Sales Growth

As you can see below, Atlassian's revenue growth has been very strong over the last year, growing from quarterly revenue of $459.5 million, to $614 million.

Atlassian Total Revenue

And unsurprisingly, Q1 was another great quarter for Atlassian with revenue up 33.6% year on year. On top of that, revenue increased $54.4 million quarter on quarter, a strong improvement on the $9.18 million decrease in Q4 2021, and a sign of acceleration of growth, which is very nice to see indeed.

Analysts covering the company are optimistic about the growth going forward and are expecting the revenues to grow almost 20% over the next twelve months.

Customer Growth

You can see below that Atlassian reported 216,500 customers at the end of the quarter, after its definition of a customer was updated during the quarter to exclude single user customers. Considering the new methodology, the company added 11,746 net new customers, demonstrating that the business itself has good sales momentum.

Atlassian Customers

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Atlassian's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 84% in Q1.

Atlassian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.84 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a great gross margin (actually one of the highest among the public SaaS businesses), that allows companies like Atlassian to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Key Takeaways from Atlassian's Q1 Results

With a market capitalization of $86.7 billion, more than $1.6 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

It was good to see Atlassian outperform Wall St’s revenue expectations this quarter. And we were also excited to see the really strong customer growth. Zooming out, we think this was strong quarter, showing the company is staying on target.

Is Now The Time?

When considering Atlassian, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Atlassian is a great business. While we would expect growth rates to somewhat moderate from here, its revenue growth has been strong, over the last two years. On top of that, its impressive gross margins are indicative of excellent business economics, the company is producing plenty of free cash flow and its very efficient customer acquisition hints at the potential for strong profitability.

Atlassian's price to sales ratio based on the next twelve months of 31.8x indicates that the market is definitely optimistic about its growth prospects. Atlassian, like many tech companies, has seen its stock price take a hit and we think the market is offering us an opportunity to own a great company at a good price.

The stock is down 26% off its all time highs at in October and now trades at $334.9 per share. Looking at the tech landscape today, Atlassian's qualities really stand out and we like it at this price. The Wall St analysts covering the company have a one year price target of $483.5 per share, implying that they see a big upside in buying Atlassian even in the short term.

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