Atlassian (TEAM -1.42%) has generated massive gains for its early investors since its initial public offering (IPO) on December 10, 2015. The Australian software company listed its shares at $21, up 32% to $27.67 in the very first trade.
Atlassian’s stock eventually closed at an all-time high of $458.13 last October, which means a small $3,000 investment in its IPO could grow to more than $65,000 in less than six years.
However, Atlassian stock subsequently fell back to around $230 as rising interest rates drove investors away from more expensive tech stocks. But even after that painful rejection, that initial $3,000 stake is still worth nearly $33,000 today.
Can Atlassian still have room after growing from a $4 billion company to a $60 billion one in less than seven years? Let’s examine its business model, growth rates, and valuations to find out.
What does Atlassian do?
Atlassian’s cloud-based ecosystem contains two main products. Jira, launched in 2002, enables companies to plan, track, and release products. Confluence, released in 2004, allows employees to collaborate and share documents with each other.
At the time of its IPO, Atlassian served approximately 48,000 customers and 5 million monthly active users (MAU). Today, it serves more than 200,000 customers, including 83% of the Fortune 500, and 10 million MAUs.
How fast is Atlassian growing?
Between fiscal 2016 and fiscal 2022 (which ended this June), Atlassian’s revenue rose from $457 million to $2.8 billion, while its adjusted net income grew from $71 million to $434 million. Both its revenue and adjusted net income increased at a compound annual growth rate (CAGR) of 35% during those six years. Analysts expect its revenue to reach $6.1 billion by fiscal 2025, representing a CAGR of 29% from fiscal 2022.
Atlassian’s annual free cash flow (FCF) increased from $129.5 million in fiscal 2016 to $764 million in fiscal 2022, even as it acquired more companies like Trello, OpsGenie, Agilecraft, Code Barrel, Halp, Mindville, and Chartio. Those acquisitions expanded its presence in the help desk, digital workflow, automation, data visualization, and IT service management markets.
However, those purchases — along with stock-based compensation — have kept Atlassian unprofitable under generally accepted accounting principles (GAAP) since its IPO. By that measure, the company posted a net loss of $614 million in fiscal 2022, and analysts expect it to remain unprofitable through fiscal 2025. All that red ink has caused a loss of luster. of Atlassian stock as rising interest rates punished unprofitable companies.
Consider the competitive threat
In its most recent annual report, Atlassian admitted that its markets are “fragmented, rapidly evolving, highly competitive, and with relatively low barriers to entry.” Its name Microsoft, which competes against Jira on Github and Confluence on Teams, as a major competitor. It’s also naming Service Today and Asana as rivals in collaboration and digital workflow services, and Monday.com as a work management software competitor.
Atlassian points to that too Alphabetby Google and Engines of International Business provide similar services in their larger collaboration and productivity suite. It admits that a bundling and pricing war among all these platforms could make it harder to “compete effectively” in the future. All that competition could limit Atlassian’s pricing power, force it to acquire more companies (which could further fragment its business), and prevent it from making a profit.
Think about values
At its all-time high in October, Atlassian was worth $116 billion — or a whopping 41 times the sales it will generate in fiscal 2022. Today, it’s worth nearly $60 billion, or more than 16 times this year’s sales.
The price-to-sales ratio is still rich for a cloud-based software company that’s expected to generate less than 30% sales growth over the next few years. In comparison, ServiceNow, which is expected to grow its annual revenue at a CAGR of 24% from 2021 to 2024, is trading at 11 times this year’s sales. Monday.com, which is expected to grow its annual revenue at a CAGR of 45% from 2021 to 2024, is trading at 12 times this year’s sales. Therefore, I wouldn’t be surprised to see Atlassian shed another quarter of its market cap before it is considered reasonably valued.
Don’t expect more multibagger gains (for now)
Assuming Atlassian generates $6.1 billion in revenue by fiscal 2025 but its price-to-sales ratio cools to 12, the company could be worth about $73 billion. That represents a modest gain of about 20% from its current levels — so investors shouldn’t expect it to replicate the big post-IPO gains anytime soon.
Atlassian has had a great run since 2015, but investors should expect analysts to take a closer look at competitive threats, persistent losses, and premium valuations in this difficult market for imperfect growth. stocks.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Alphabet (A shares). The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Asana, Inc., Atlassian, Microsoft, ServiceNow, Inc., and monday.com Ltd. The Motley Fool has a disclosure policy.