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It’s Not Too Late to Join the Atlassian Team

Ian Bezek

At the opening bell on Friday, it looked like Atlassian (NASDAQ: TEAM ) was set for a huge bull run following a blowout earnings report. TEAM stock opened at $99 and soon hit $100, which was a new all-time high. It would never manage to exceed $100, however, and by the end of the day, TEAM stock ended up taking a loss. Shares reversed 10% lower from the highs to close down slightly overall.

Despite a strong stock market Friday, TEAM stock couldn’t hold onto its early gains. What went wrong for Atlassian? It certainly wasn’t the earnings report; earnings were excellent. Yet TEAM stock will have to wait a while before it tops $100 for the first time.

Here’s why…

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Great Expectations

Atlassian is a classic example of investors pricing a stock for perfection. TEAM stock is selling at more than 20 times its trailing revenues. That’s a crazy figure. Generally, the acceptable line is paying 10x revenues for a fast-growing tech company. Investors often experience bad results buying high-growth companies above the 10x sales level.

At 20x sales, you need a business to perform perfectly for the stock to keep rising in the near-term. Notably, many of Atlassian’s comparable peers are trading at far lower price/sales ratios. Hubspot (NYSE: HUBS ) is at 12, for example. Meanwhile, both Zendesk (NYSE: ZEN ) and New Relic (NYSE: NEWR ) sell for 13x sales. TEAM stock, at more than 20x, is a clear outlier.

In Atlassian’s case, they put in what seemed like a great quarter. They beat on revenues, earnings, and raised guidance going forward. It was a pretty substantial boost to guidance, as well, with Atlassian guiding to ~$125 million in revenues above and beyond the street consensus for full-year 2019. Perhaps most impressively, their revenue growth rate actually went up despite growing off a much larger revenue base. Still, it wasn’t enough to keep Atlassian’s stock going up past the opening bell.

Running Ahead Of The Sector

If tech stocks as a group were soaring to new heights, TEAM stock would certainly be going up as well. But that’s not the case. In fact, the tech-heavy Nasdaq 100 index, as measured by the Invesco QQQ ETF (NASDAQ: QQQ ) sits 13% off its recent highs. The FAANG stocks remain under considerable pressure with Netflix (NASDAQ: NFLX ) missing on earnings and Facebook (NASDAQ: FB ) getting hit with another government investigation.

More particularly to TEAM stock, many of its software-as-a-service “SAAS” peers tumbled during the 2018 correction. It will take awhile for investors to warm back up to tech and SAAS stocks. As such, it will be hard for TEAM stock to keep moving to new all-time highs until sector enthusiasm returns. It’s a credit to Atlassian that it is putting up better earnings than its peers. But upside will be limited until the sector gets hot again.

Long-Term Growth Story Remains Great

Looking past the short-term noise, however, all signs are still pointing upward for Atlassian. Let’s start with a key metric — the customer base. It grew by more than 7,000 net new customers for the quarter, taking Atlassian’s client count to more than 138,000. This growth rate picked up from the previous quarter. Zooming out, at this time last year, Atlassian had just 113,000 customers. Two years ago, it had only 69,000 customers.

With that sort of overall growth in the customer base, it’s no surprise that Atlassian is putting up huge revenue numbers. For the quarter, Atlassian grew revenues 39% year over year. This was a smashing beat against the Street’s estimate of just 34% growth.

One particularly exciting note for Atlassian is that its Atlassian Marketplace continues to be a great success. The Marketplace allows vendors to sell apps with Atlassian taking a cut of the profits. As Atlassian attracts more customers, the value of its ecosystem expands, allowing it to collect more of these revenues. For the quarter, the Atlassian Marketplace showed 58% revenue growth, offering a highly attractive, burgeoning revenue stream for investors.

Finally, it’s worth noting that even when Atlassian seemingly makes a rare misstep, it can make lemonade out of lemons. A recent example is with its Stride collaboration IM product. After significant investment, it abandoned the project. However, it was able to sell it, along with Hipchat, to the trendy Slack , which is a leader in cloud-based communication and collaboration products. Atlassian scored an equity stake in Slack, which could end up being quite valuable at some point, along with a product alliance to promote each others’ offerings.

TEAM Stock Verdict

Atlassian stock represents a classic dilemma. This is a great business — a fantastic business, in fact. But the price is totally wrong. Despite an excellent earnings report that topped expectations on nearly all fronts, TEAM stock still went down. If you pay too high a price for a stock, it is hard to make short-term profits.

That said, buyers of TEAM stock that are willing to hold for a few years will almost certainly do well. As long as its revenue growth continues like it has been, the sky is the limit for the company. Newer offerings such as the Atlassian Marketplace should keep the company’s growth rate in the stratosphere for years to come.

TEAM stock is still really expensive at $90/share. Don’t expect any miracles in 2019 as far as the share price goes. But TEAM stock is worth watching, particularly if it dips more. Selling a cash-covered put option would be another way to get a better entry price on TEAM stock.

At the time of this writing, Ian Bezek owned FB stock. You can reach him on Twitter at @irbezek.

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