Work management software leader Atlassian (TEAM 2.25%) has been a great example of a business that has grown in grand fashion, but delivered little in the way of positive shareholder returns. Share prices are down well over 20% so far in 2024, doing little to reverse what has been a lackluster story in the wake of the pandemic and cloud software stock meltdown.
That said, Atlassian has made plenty of other stakeholder accomplishments over its lifespan, and there could be tremendous value here. Indeed, where many growing software stories have totally withered, this one has endured by many counts.
Is it time to buy the dip on Atlassian despite the risks?
Lots of growth, just not the kind investors want right now
Atlassian has been on a multi-year journey migrating customers from "Server" products (a perpetual license to use software) to "Data Center" and Atlassian "Cloud" (cloud being the ultimate goal to migrate customers to, where the company fully manages the product and delivers frequent updates, enhancements, and new features). Server products were sunsetted a few years ago, with ongoing support migrating to Data Center and Cloud products.
In the third quarter of fiscal 2024 (the three months ended in March), management reported a heat-up in migrations to Data Center and Cloud. This included a record 64% year-over-year increase in Data Center revenue as some existing customers decided to finally pull the plug and move away from the old non-supported Atlassian on-premises server software. No doubt new artificial intelligence (AI) features are motivating existing customers to upgrade. Atlassian says early adopters are getting an ample boost in productivity by unlocking the automation of workflow tasks and employee ticket completion within its products.
As a result of the ongoing Atlassian migrations to Data Center and Cloud, total revenue grew 30% year over year in Q3 to $1.19 billion.
But there's more to the story helping propel Atlassian's expansion. In the last year, a number of acquisitions were made, including the nearly $1 billion purchase ($1.5 billion in Australian dollars) of tech worker video creation platform Loom. A couple of smaller software companies were also purchased: AirTrack, used to account for, track, and analyze digital data, and Optic, which worked with OpenAI to develop API documentation and management tools for software engineering teams.
In part due to the purchases, plus the benefit from more Data Center and Cloud software sales, Atlassian's current deferred revenue on the balance sheet (revenue collected, but not yet recorded as such until services are rendered to customers) increased by $336 million in Q3 compared to the year prior. The full integration of Loom in particular (the completion of the Loom takeover was in November 2023) could keep this metric rising in the coming quarters, and lead to more acceleration in revenue growth around that 30% mark.
It all adds up to fantastic progress for the top dog in workflow management software (it's still far and away the leader, in front of peers like Monday.com, Asana, and Smartsheet), but investors are still looking for more financial progress elsewhere.
One key metric getting ready to ratchet higher?
On a per-share basis, free cash flow has risen under 200% in five years. Paired with the flat stock price, it's turned Atlassian from a high-flying but premium-priced stock to one that appears downright reasonable (at least by this metric) at around 30 times trailing 12-month free cash flow.
However, GAAP earnings per share (EPS) are still negative over the last trailing 12 months, although EPS finally flipped to positive territory (at $0.05 per share) in the recent quarter.
Data by YCharts.
This is what still has the market feeling glum on Atlassian. Even after a punishing bear market where investors demanded higher GAAP profits, the company has still doled out $808 million in employee stock-based compensation (SBC) through the first nine months of its fiscal 2024. That's the primary metric keeping a lid on more robust GAAP profitability. Until more cost controls are enforced, Atlassian shares may continue to struggle for direction.
That said, progress on this front is improving dramatically. Even with the large amount of SBC, GAAP net loss of $209 million in Q3 2023 improved all the way to net income of $12.8 million in Q3 2024. If the company keeps that up, the market may eventually start to take notice.
I don't have any room in my portfolio to nibble here, but after the latest earnings update, Atlassian might be a decent cloud software bet right now -- assuming positive progress continues on profitability.
