Atlassian stock soars amid robust growth, but high valuation raises concerns By Investing.com

Atlassian (NASDAQ:), an Australian enterprise software company, has seen its shares rise by nearly 60% this year, underpinned by steady revenue growth and expanding operating margins. The company, known for its key products Jira and Confluence, has been a significant player in the project management and collaboration tools market for over two decades.

As of the end of the fiscal year on June 30, 2023, Atlassian reported an 8% increase in customers across its suite of platforms, reaching a total of 262,337 from 242,623 in the previous fiscal year. The company’s cloud platform accounted for the majority of its revenue in the fourth quarter of fiscal 2023 at 60%, with the remaining revenue generated from its data center (25%), server (9%), and marketplace and services (6%) platforms.

However, revenue growth varied across these segments. In Q4 2023, the cloud segment saw a year-on-year growth of 30%, down from 55% in Q4 2022. The data center segment recorded a robust growth rate of 46%, while the server segment experienced a decline of 27%. The marketplace and services segment saw a growth rate of 17%.

The decline in server revenue is linked to Atlassian’s strategic shift towards cloud and data center platforms. The company is actively transitioning all server-based customers to these platforms and plans to discontinue support for its server business by February 2024.

Despite this strategic shift, Atlassian’s cloud business experienced a slowdown due to macroeconomic factors causing companies to cut back on spending. Conversely, the data center unit fared better as it absorbed more server-based customers. The marketplace and services segment continued to grow due to an expanded marketplace for third-party apps and subscription-based support services.

For fiscal Q1 2024, Atlassian forecasts an 18% to 20% year-over-year increase in revenue, with its cloud revenue expected to rise between 25% and 27%. However, the company did not provide a total revenue outlook. Analysts predict an 18% growth for the full year, down from the 26% growth seen in fiscal 2023.

Despite its impressive growth, Atlassian’s valuation is not considered cheap, with an enterprise value of $50 billion and trading at 13 times this year’s sales. This is comparable to its larger cloud-based peer ServiceNow (NYSE:), which also trades at 13 times its estimated sales and is expected to generate a 23% revenue growth this year.

Atlassian’s adjusted gross margins have remained steady over the past year, indicating strong pricing power. However, the company expects these margins to drop slightly to 83.5% in Q1 of fiscal 2024, with its adjusted operating margin also anticipated to decline to 19.5%. This contraction is attributed to increased investments in the enterprise cloud platform and the development of new IT service management products.

While no guidance was provided on near-term profits, analysts forecast a rise in adjusted earnings per share by 31% year over year in Q1 and by 11% for the full year. Despite the company’s high valuation and unprofitability based on generally accepted accounting principles (GAAP), it continues to attract investors. However, its high debt-to-equity ratio of 5.3 remains a concern.

Given these factors, some investors may be hesitant to buy Atlassian’s stock at its current valuation until it shows progress towards generating GAAP profits and reducing its leverage.

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