Atlassian Is Up +60% in Three Months—What's Causing the Rally?

Key Points

• Atlassian's share price has been on a rollercoaster ride in 2024, but it has been up big since August.
• The company's transition to its cloud-based product delivery went smoother than expected last quarter.
• A reasonable valuation versus peers and cloud transition momentum are positive signs going forward.

Atlassian NASDAQ: TEAM is a tech stock that has been on the rise big-time lately after suffering a difficult first seven months of 2024. The stock's 52-week low was back on Aug. 7. At that point, shares were down 42% during the year. But since then, they have made a massive comeback, up 62%. All in all, shares are still down just over 5% in 2024 but exhibit a positive trend. I’ll provide some background on what this company does and examine the ride it has gone on so far this year. I’ll close by providing my view on the future of this stock.

Atlassian’s Productivity Boosting Software and Product Delivery

Atlassian makes software that allows teams to collaborate more efficiently. Some of its main products are Jira, Confluence, and Loom. Jira is a project management software that allows technical and business teams to plan together more effectively and complete projects. Specifically, it could allow the web development and social media teams at a company to better manage the rollout of a new section of their website. This could help balance the need to provide engaging content in a way that is also user-friendly.

Confluence is a platform where employees can share documents and data to work on them in a collaborative fashion. Loom allows for asynchronous video communication between team members. This means a team member can record a video and send it to their colleagues. They can watch it at their convenience instead of joining a live video call. The thought behind this is that it allows for a more human sharing of ideas without needing to communicate in real-time. For example, this could allow for a better expression of an appreciative tone when asking a teammate for help as opposed to a written message.

Last quarter, 95% of revenue came from subscriptions to its software products. Another important point of note is the two main ways customers can access the software. The first is Cloud, where Atlassian runs the software on its own hardware, and customers access it through the internet. The second is Data Center, where enterprises run the software on their own hardware.

Outlining Atlassian’s Tumultuous 2024 Journey

The company’s shares have dropped massively after each of its first three earnings releases in 2024. On average, shares fell just under 15% in the three days after each of these results. This was despite the company beating expectations on both sales and adjusted earnings per share each time. The company beat estimates again in its fourth earnings report of the year. But this time, the reaction was different. Over the next three days, shares were up nearly 17%. So, why was this the case?

The company has been pushing more customers to use its cloud-based platform and posted strong numbers in that part of the business. It beat its cloud revenue growth guidance of 27% strongly, with actual growth coming in at 31%. This wasn’t the case in previous quarters. This showed that the migration of customers, the increase in relationship size, and new growth went faster than expected. It also raised growth guidance for the full year for this segment, adding to the optimism.

Atlassian’s High R&D Spending Is A Double-Edged Sword

The cloud progress is a good sign, but it is also important to note that Atlassian is still consistently unprofitable. That is a bit of a scary sign for a company worth $57 billion. Despite its long history, it ranked 11th out of 40 large-cap U.S. software companies for revenue growth last quarter. Supporting growth is the company’s decision to spend an average of 48% of its revenue on research and development (R&D) since 2016. The number is 50% over the last twelve months, the highest percentage out of those 40 stocks. This leaves a lot of room for the company to improve its margins if it cuts R&D spending to become profitable. However, revenue growth is also likely to drop much faster than otherwise if it does.

On valuation, the company’s Enterprise Value to Sales ratio is basically right in the middle of the pack among those 40 stocks. Given this, the positive momentum in its cloud transition, and the still-recent introduction of its AI tool Rovo, I wouldn’t be surprised if this stock continues its run-up. Wall Street overall isn’t super excited at this point; the stock’s average price target implies just an 8% upside.