Shares of team-building and collaboration software company Atlassian (NASDAQ:TEAM) have more than doubled in the last year. Revenue and adjusted profits for its recently completed 2018 fiscal year increased by 41% and 36%, respectively, from last year. Next year's sales are expected to nearly match that; management sees at least another 31% rise in order.
That expected growth comes despite Atlassian ceding its real-time communications services Stride, Hipchat, and all related products to friendly competitor Slack. The headwind from this transaction (discussed below) will likely be modest, and could be the beginning of a new powerhouse in the digital workplace industry.
What do these companies do?
Atlassian builds digital collaboration software for business teams. The company offers a suite of software that spans customer service, software development, project management, and security. Atlassian has over 125,000 paying customers and carries a market cap of $20 billion.
As for Slack, the privately-held company offers its namesake platform for teams to communicate, share files, and work on projects together. Slack says it has over 70,000 paying customers and has raised investment funding that's pushed it to a valuation of over $1.2 billion this year. What makes this so impressive is that Slack was founded a mere nine years ago.
Atlassian and Slack individually champion the power of teamwork, so this deal represents both companies following their own best advice.
Just business...or something more?
Per Atlassian's and Slack's announcements, Slack is purchasing the Stride and Hipchat intellectual property for an undisclosed sum. Atlassian will continue running those services through early 2019 before giving users a few paths to transition over to Slack's platform. In exchange, Atlassian will receive an undisclosed equity stake in its former competitor.
Atlassian made its live communications service debut in 2017, but in spite of the company's reputation as a productivity booster, headway with its new product has been limited. Some real heavyweights operate in the space, like Microsoft Teams, Alphabet's Google Hangouts Chat, and Facebook's Workplace. Atlassian's bread and butter services compete with other heavy-hitters like salesforce.com.
Despite the odds and irrespective of Atlassian's disappointing collaboration investment, startup Slack has managed rapid growth in just a few years. The two companies have formed a new partnership so that each can focus on what it does best in support of the digital workforce, while benefiting from each other's resources. Slack gets new clients funneled its way, and while Atlassian is giving up about $1 million in revenue next year, it will make some money back when migrating customers to Slack. Plus, it won't have to support a struggling investment, and will be able to share in Slack's continued success via its equity stake.
Since the two companies already share many joint customers, this is surely a precursor to something more, maybe even a courtship of sorts. Either way, this new aligning of interests looks like a win-win for both software companies. Given Atlassian's and Slack's fast-growing businesses -- and what I think will be a tying of the knot down the road -- Atlassian's stock looks like a good way to bet on digital workforce tools, with the added benefit of getting in early on privately held Slack.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Nicholas Rossolillo and his clients own shares of GOOGL, GOOG, FB, MSFT, and CRM. The Motley Fool owns shares of and recommends GOOGL, GOOG, Atlassian, FB, and CRM. The Motley Fool has a disclosure policy.