The earnings season is starting, and we’ve already seen strong quarters from some of the big companies like this. Microsoft at Apple. However, investors who own tech stocks have an important earnings period this quarter. Many growth stocks have broken down over the past three months, and this earnings period could change things.
One of the first cloud stocks to report earnings this season was Atlassian (NASDAQ: TEAM), and it does not evade greatness. The company posted strong results in almost every aspect of its business, sending shares up nearly 10% on Friday, Jan. 28. It brought the company to a market capitalization of $ 80 billion. So is it still worth buying this expert team management tool if you want to see multi-bagger returns over the next decade? Lets find out.
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A blowout quarter
Atlassian has a set of workflow management tools that make teams more efficient. Its tools like Jira Work Management, Trello, and Confluence allow teams to collaborate, develop, and create products easily together. As you might expect, the need for collaboration tools hasn’t gone away, and Atlassian has benefited greatly from that. The company increased its Q2 2022-which ended Dec. 31, 2021-revenue by 37% year-over-year to $ 688 million, and reduced its net loss to $ 77 million, from $ 622 million in the previous quarter. Both of these results easily beat Wall Street expectations.
Thanks to exceptional cloud usage, Atlassian’s revenue growth accelerated this quarter to 37%, previously in the high-20%to-low-30%range. Cloud revenue grew 58% year-over-year, marking a strong acceleration in growth from Q1 2022, when Atlassian posted 53% year-over-year revenue growth. This quarter was the fastest cloud growth for any quarter in the past six quarters, and cloud revenue now generates 53% of revenue, compared to 46% in the previous quarter.
The company was not profitable this quarter-its net loss margin was approximately 10%-but the company reported strong money generation. Atlassian has more than $ 197 million in free cash flow, which has grown 10% year-over-year. Now the company has a free cash flow margin of almost 29% – meaning for every $ 1 it earns, it generates $ 0.29 in cash income. This impressive performance, combined with $ 900 million in cash and equivalents on its balance sheet, means investors shouldn’t have to worry about Atlassina’s unprofitability.
The company invests heavily in research and development to establish itself as a leader in this competitive industry, hence the company remains unprofitable. However, these investments are paying off: Atlassian has become a leader in the Enterprise Service Management space, according to Forrester’s Wave. Today the Atlassian is one of the top two dogs on the market, against Service Today (NYSE: NOW).
Armor scratches
Not all sunshine and rainbow in this quarter. The Chief Technology Officer, Sri Viswanath, has announced his departure at the end of the 2022 fiscal year. This release is for Sri to take other opportunities, and with a studded resume for his work at Atlassian, he has the potential to become a big name in the tech space. Since joining in 2016, Viswanath has been one of Atlassian’s key developers of cloud-based solutions, which now forms the core of its business.
Atlassian shares are still very expensive. They’re down nearly 30%-in line with tech sell-offs-but not as much as other high-flying tech stocks. The shares are currently trading at approximately 36 times sales, which is higher than most stocks in this space. ServiceNow, for example, trades 19 times sales.
Is this a purchase?
Despite the company’s high appreciation and high market cap, it’s worth buying the Atlassian now because it works in all fields. The company’s growth strategy is and will continue to be in the cloud for the foreseeable future, and this quarter is a good example of what investors should be looking for in the coming Atlassian quarters. With the acceleration of growth in both total revenue and cloud revenue, it’s easy to see that customers are quickly using Atlassian’s cloud products and expanding their relationships with the company.
The company is also leveraging its brand name and pricing power by raising its prices, showing how much Atlassian dominates this space as a leader. The company is looking at a viable market of $ 24 billion, and with just $ 2.4 billion following twelve months of revenue, it has plenty of room to expand. With its industry leadership and strong execution, I think Atlassian will be able to capitalize on its position.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool counseling service. Let’s be motley! Asking an investing thesis-at least one of us-helps all of us think critically about investing and make decisions that will help us become smarter, happier, and richer.