The market -- in fact, the economy in general -- has fallen quicker than at any point in modern history. In time, we will see official unemployment numbers sky-rocket, and official productivity numbers plummet.
This is a scary time. It underscores why Warren Buffett's dictum of "being greedy when others are fearful" is much harder in practice than it is in theory.
That said, if you've got extra cash in your retirement portfolio you won't need in the three years ahead, there's one company that deserves your attention. I've put more of my own money into it in the past month than any other: Atlassian (TEAM -0.75%).
Image source: Getty Images
First, an introduction
Atlassian is a software-as-a-service (SaaS) company that focuses on making collaboration within a company easier. The company got its start in 2002 when Australian co-founders (and still co-CEOs) Mike Cannon-Brookes and Scott Farquhar were bored with their grad school internships and boot-strapped the company using $10,000 in credit card debt.
Since those early days, the company has expanded to offer a huge portfolio of tools to improve productivity. Some of the most important include:
- Jira: Planning and management tool to track issues and bugs within a system.
- Confluence: A tool for creating and sharing work across a company.
- Trello: A visually focused way of managing projects.
- Bitbucket: A service allowing teams of coders to share work.
- Opsgenie: Helps manage incidents with technology in real-time.
There are many more. But they all fall under the larger umbrella of the company's lasting mission: "to help unleash the potential of every team."
Incredible business momentum
As you'll soon see, Atlassian is clearly building tools that customers like. On virtually every metric, growth is robust:
| Metric | 2017 | 2018 | 2019 | TTM | Growth Rate |
|---|---|---|---|---|---|
| Revenue | $627 million | $881 million | $1,210 million | $1,416 million | 39% |
| Subscription Revenue | $250 million | $411 million | $634 million | $777 million | 57% |
| Free Cash Flow | $184 million | $281 million | $422 million | $489 million | 48% |
| Customers | 89,237 | 125,796 | 152,727 | 164,790 | 28% |
Data source: SEC filings. Fiscal year ends on June 30. TTM= Trailing twelve months. Growth Rate = Compounded annual growth rate, or CAGR. All financial figures rounded to the nearest million.
Let's digest all of these numbers to highlight what's really happening here.
- Growth: While total annual revenue growth is brisk (39%), high-margin subscription revenue is growing even faster. That not only increases profitability but widens the company's moat (more on that below).
- Profitability: Incredibly for a relatively young SaaS company, Atlassian has converted over one-third of sales into free cash flow.
- Popularity: Customer growth has been rapid, though this was admittedly helped by acquisitions.
Combine these numbers with the fact that Atlassian has $2 billion in cash and no long-term debt, and on paper, at least, Atlassian looks like a solid investment.
Dig deeper and it gets even better
All this being said, none of the above matters if a company doesn't have a moat -- or sustainable competitive advantage -- protecting it from the competition. Many would be quick to point out, in fact, that a company like Microsoft could swoop in and steal business from Atlassian any day now.
But Atlassian most assuredly does have a moat -- in fact, it has two. The first is high switching-costs. Speaking from experience (we use Trello for some work via The Motley Fool), it is a pain to give up one interface for getting work done and have to learn and train on an entirely new one. The pace of productivity can slow dramatically.
While Atlassian doesn't offer a dollar-based expansion metric to help us measure these switching costs, the growth noted above and my personal experience are enough to convince me they exist.
Furthermore, the company also hosts the Atlassian Marketplace. This is where third-party app developers create tools for Atlassian customers, with the company keeping a 25% cut of all sales. Think about it: Atlassian doesn't spend a dime, and rakes in the money solely because it hosts the marketplace.
It also creates powerful network effects: The more third-party apps, the higher the incentive for companies to use Atlassian, which draws in more app developers...and so on.
The cherry on top
Finally, I believe the day is soon coming where companies will start consolidating all of the SaaS tools they use.
If I owned a company, for instance, I could spend the time making sure I've got the very best software for one thing, and the very best for another. But that would take time. It might be just as enticing to choose one company that offers a wider range of tools -- all of which are more than capable of getting the job done. In essence, this is what I believe Atlassian is. This isn't a knock on the quality of existing tools, just an observation that it would be far more convenient to pay one bill to Atlassian than five different ones to five different vendors every month.
The final word
Atlassian already accounts for over 3% of my family's real-life holdings, but I'll be adding even more when Motley Fool trading rules allow. That's how much I believe in the company. It would be well worth your time to start your own due diligence if you're looking for a solid SaaS stock in your portfolio.
