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Thesis on Investment
Atlassian (NASDAQ: TEAM) dropped more than 50% from its previous highs. The workflow planning platform has not survived the many compressions that have devastated the technology sector.
However, compared to many of its trading peers, the Atlassian still carries a very punchy multiple.
Arguably, the best way to describe Atlassian is, a fantastic company with a very fair lot. For investors with a very long horizon, this is a reasonable entry point.
For investors who typically have a two to three-year horizon, they will have a hard time finding a sufficiently near-term upside because of the challenging backdrop the company has to navigate.
Atlassian Revenue Growth Rates Remain Attractive, But
TEAM revenue growth rates
If Atlassian grows below 30% CAGR, that is a mental threshold that will make this “high-growth” SaaS stock less attractive to high-growth investors.
High-growth investors typically seek, as the name implies, hyper-growth stocks, which are typically viewed as anything over 30% CAGR. And the higher, the better.
For types of companies with consistently high growth rates, depending on the beliefs shareholders have, investors are often willing to pay any price.
Although it appears that Atlassian’s guidance for Q4 points to 30% y/y growth, I believe there is a strong possibility that Atlassian is conservative in its guidance.
After all, this is a company known for low estimates. In fact, consider the following quarterly beats:
Beat TEAM revenue
As you can see above, over the past 12 quarters, Atlassian has easily beaten analysts ’earnings estimates.
Consequently, I believe it is reasonably safe to assume that even if, for some reason, Atlassian misses quarterly estimates for its upcoming earnings in Q4, it will be a temporary recession, and nothing more. more harmful than that.
That said, there are very clear concerns in the near term that investors should be concerned about.
Clouds on the Horizon
We are now navigating the most challenging investment environment in many years. We have very little visibility right now on how this revenue season will begin.
What we do know is that companies with large amounts of overseas earnings are suffering from large currency headwinds, as the dollar has been particularly strong this year.
Tech investors generally don’t consider FX currencies as a factor, but if a 10% headwind in the y/y comparison is on the cards, that could affect reported high growth rates. Atlassian.
work of the author
Within its revenues in the Americas, the majority comes from America, with approximately 5% of total revenue coming from the Other Americas.
This means that more than half of its revenues have exposure to currencies other than the dollar. That could cause some headwinds for Atlassian reporting in Q4 2022 and early 2023.
Also, another important issue is what we heard from ServiceNow’s (NOW) CEO yesterday.
ServiceNow is the most blue of tech blue chips. Its business model specifically targets the largest businesses in the world. Outside of Microsoft (MSFT) and a few names, ServiceNow is probably the best tool to navigate in a recessionary environment.
And even then, the commentary pointed to ‘‘ rising energy costs and the ongoing war between Ukraine and Russia ’’ as having a detrimental effect on its business.
Since Atlassian’s business model aims to sell its products to a large number of smaller businesses with a small group of developers, I tend to believe that Atlassian may in the near term negatively surprise investors with its upcoming revenues.
Smaller companies typically have fewer financial resources to navigate a downturn, as you know.
TEAM Stock Analysis – 14x Fwd Sales, Fair Price
In anticipation of next year, Atlassian is priced at approximately 14x forward sales. Atlassian believes its stock is price inconsistent compared to its peers, so Atlassian is looking to redomicile in the US. This is meant to raise investor awareness and buy its stock more ETFs.
On purpose, I don’t believe that will add much to much of it. If we adjust for different financial periods, Asana’s (ASAN) is now priced at 5x forward sales. And monday.com (MNDY) is worth 8x forward sales.
While we clearly recognize that Atlassian is more profitable than its peers, we should also keep in mind that its peers are growing faster, too.
So, I don’t believe someone can slap their fist on the table by arguing that this move makes much sense.
The Bottom Line
Atlassian is a very well managed company, with both founders very active in top executive positions. They always have an eye towards profitability and maximizing shareholder value.
However, with 14x forward sales, with so much near-term macro uncertainty, it’s hard to make the case that the stock is particularly undervalued.