Atlassian: Upside Still in Play After Impressive Earnings Spike

Key Points

• Atlassian delivered quarterly results that blew the market's socks off, sending shares up big.
• The company made strong progress in attracting a larger number of customers.
• Despite a lofty valuation, the company's impressive track record provides reason to believe its value can continue growing.

Through the first part of 2025, one of the most impressive stocks on the market is Atlassian NASDAQ: TEAM. As of the Feb. 3 close, shares of the technology stock are up by over 28%.

Meanwhile, the S&P 500 Index has returned 2%. A key catalyst for the rise in Atlassian shares was the company’s earnings report, which greatly exceeded expectations.

Shares jumped by nearly 15% after the release. Below, I’ll break down how the company achieved its stellar results. I’ll also examine whether there remains juice to squeeze out of this stock, both on a short-term and long-term basis.

Atlassian: Fiscal Q2 Results Surpass Wall Street Projections

In Q2 of its 2025 fiscal year, Atlassian’s results impressed on many fronts. On the top line, revenue came in at nearly $1.29 billion, surpassing FactSet estimates by around $50 million. The level of outperformance against expectations rises when moving down the income statement. The company beat operating income estimates by nearly $70 million.

Ultimately, the company’s adjusted earnings per share (EPS) came in at $0.96, beating estimates by 27%. The company grew sales faster than expected. It also made strong progress in expanding margins. Growth on the top and bottom lines remained strong, with revenue and free cash flow both increasing by 21%. To top it off, the company also issued fiscal Q3 sales guidance that was $39 million higher than expected.

Atlassian's Three Key Business Drivers to Understand

The company was able to drive these impressive results in several ways, which are important to understand. First is the company’s effort to attract larger customers, which looks like it is succeeding. The company achieved a record number of contract wins valued at over $1 million. The Enterprise edition of the software, aimed at large companies, grew by 40%. This is almost double the company's overall revenue growth. In addition, its Premium offering also grew by 40%. The firm says in the earnings call that its Atlassian Intelligence offering, which adds AI to its products, is helping to build more extensive customer relationships. Customers are interacting with the firm's AI features 25 times more than last year. Increasing the size of customer relationships is a key way to drive higher-than-expected revenue.

Another key point to understand about Atlassian is that the firm has extensive operating leverage. This means that fixed costs make up a lot of its overall cost structure. Due to this, revenues tend to rise disproportionately faster than costs. This means that a small revenue beat can lead to a very large beat in profit. The company only beat revenue estimates by 4%, yet it beat adjusted EPS estimates by 27% in the quarter.

The last important point of note surrounding Atlassian is the firm’s push to move more clients to the cloud. Approximately 28% of the company’s revenue still comes from customers who use their own on-premise data centers to operate Atlassian’s software. Atlassian wants to move those customers to the cloud. They will access its software by connecting to a data center that Atlassian operates. This means that Atlassian must shoulder the costs of operating this computing power. However, the company is willing to do this because it believes it can offset those costs with higher growth. Having customers access software through the cloud makes it easier for the company to roll out new features and upsell customers. The company grew cloud revenues strongly by 30%.

TEAM: Near and Long-Term Opportunity

Looking at Atlassian's valuation metrics, it's hard not to be at least a little apprehensive. Its forward price-to-earnings (P/E) ratio of over 80x is high, even when compared to the already richly valued technology sector. Other metrics from price-to-sales (P/S) and price-to-free-cash-flow (P/FCF) tell a similar story. However, the company’s demonstrated ability to execute its plan is impressive, helping justify its valuation. Strong uptake from enterprise customers, where it still has a lot of room to grow, looks promising.

The company is less than 10% penetrated into the $67 billion serviceable market that it sees. Still, given that the company provides this massive $67 billion figure, one should take it with a grain of salt. Wall Street analysts broadly raised their price targets on the firm after its earnings release. The average of 13 price target updates after the release implies a 13% upside in shares. In my opinion, Atlassian can experience upside in the near term, although the market has likely raised expectations significantly. In the longer term, the stock has a substantial ability to keep winning.