Shares of Atlassian (TEAM) have felt the brunt of the damage amid the violent reversal in high-multiple tech stocks. The company, which creates software for software developers, has a wide moat and has done a marvelous job scooping up competitive threats like Trello. Atlassian and its arsenal of tools have been renowned within the software development community.
Though the space is commoditized, it's proven a tough task to compete against the firm, given how engrained Atlassian is in the software development process. Ask any programmer which tools they use and odds are you'll hear a thing or two about Atlassian's JIRA or its collaboration tool Confluence. The two popular offerings are often served as a one-two combo to firms.
Indeed, the company helps make the most of teams within the tech scene. For that reason, I view the company as having a vast moat that will be tough to match. I am bullish on the stock.
Atlassian Stock: The Rocky Road Behind and the One That Lies AheadAfter the stock got cut in half from peak to trough, shares have begun to regain their footing, posting a partial relief rally before coming down again to around $265 per share, where the stock currently sits today.
Currently down 45% from its all-time high, the stock has probably seen the worst of its valuation reset. However, the stock is still anything but cheap. Despite the magnitude of the decline, the almost 28 times sales multiple remains tough for value investors to get behind as rates look to surpass 3% over the medium term.
The higher the multiple (or growth prospects), the harder it will be to win back investors with the Fed now in "hawk" mode. Moving ahead, Atlassian will do more of the same.
As an invaluable provider of productivity-enhancing tools, Atlassian may be more defensive than most think, making it less vulnerable to the next sustained economic downturn. Undoubtedly, the risk of recession has risen, and with that, there is less desire to own high-multiple growth stocks that are not yet profitable on an IFRS basis.
With minimal marketing expenditures versus other enterprise software plays, the company does look to have an intriguing pathway toward future profitability. However, investors should not expect Atlassian to break into profitability anytime over the medium term.
The company's still in growth mode, and it shouldn't look to bolster margins if it's at the expense of further sales growth. Even if it means TEAM stock will get punished further, Atlassian doesn't look like it's willing to pull the brakes yet amid the workplace's digital transformation.
Atlassian is a Top Dog, but can it Retain the Lead as Rivals Approach?Software planning is a great niche that's not yet fiercely competitive. Over the years, Atlassian has held its own rather well, actually gaining share in its fast-growing market.
That said, there are a lot of up-and-comers within the (software) project management scene. With a healthy balance sheet, Atlassian could acquire such up-and-comers that threaten its moat. However, it can't acquire every potential threat to its business.
Which peer is most able to knock Atlassian off the podium? Enterprise kingpin Microsoft (MSFT) has its hands in many pies within the enterprise software space, including software planning.
Undoubtedly, Microsoft has powerful network effects. With Microsoft Teams, the firm effectively created a video-conferencing platform to compete head-on against Zoom Video Communications (ZM) amid the worst of the pandemic.
As hybrid and remote work continues to be popular among tech-savvy workplaces, I'd look for productivity and software-planning offerings to increase in demand steadily over time.
As the digital transformation takes it to the next level, I'd look to Microsoft as a top contender against Atlassian.
Indeed, Microsoft is a scary competitor that can easily upsell its existing satisfied 365 customers. For now, Microsoft is playing nicely with Atlassian, with the recent inclusion of the JIRA app within Teams.
Wall Street's TakeTurning to Wall Street, TEAM stock comes in as a Moderate Buy. Out of 15 analyst ratings, there are 10 Buys and five Hold recommendations.
The average Atlassian price target is $405.87, implying upside potential of 53%. Analyst price targets range from a low of $290.00 per share to a high of $520.00 per share.
The Bottom Line on Atlassian StockAtlassian is a quality growth company that deserves a fat premium. That said, the nearly 28-times-sales multiple may be too lofty in an environment that's grown hostile towards unprofitable tech companies.
Despite the lack of profits, investors should respect the firm for the stickiness of its product, which is looking to stay a step ahead of the competition. Many analysts remain bullish on the stock for a reason. It's a quality growth company on the right side of the ongoing digital transformation.
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