Riding the wave of digital transformation, Atlassian's (TEAM 1.49%) stock soared 85% in 2020. Since it was founded 18 years ago, its focus on team productivity and collaboration software has enabled it to become a billion-dollar revenue business. But in many ways, it's just getting started. Let's look at the dozen reasons why you would want to buy this leading software-as-a-service player and never sell.
1. Its mission is timeless
Atlassian's mission "to unleash the potential of every team" is simple, memorable, and timeless. This easy-to-remember statement makes it easy for all stakeholders to align with the company's purpose. An additional benefit is the timeless aspect of the phrase. No matter what changes over the next several decades, this mission will remain relevant.
2. Co-founders are still actively involved
Co-founders Scott Farquhar and Mike Cannon-Brookes met as incoming freshmen at the University of South Wales in its information technology program. After graduation they founded Atlassian, relying on credit cards for their initial financing in 2002. After two decades, they are still friends and share the CEO position. Their involvement enables the company to keep a shareholder-friendly long-term perspective.
3. It loves its customers
One of the company's core values is "Don't #@!% the customer," which it has demonstrated in a recent announcement to end support of its on-premise server product. Atlassian is providing a three-year window for customers to transition to its cloud-based products and loyalty discounts for those who have more than 500 users on the platform.
4. It's got a broad ecosystem of products
Atlassian has 17 core cloud-based software applications that support teams for project planning and execution, software management, post-release customer support, and collaboration/document sharing. A customer can start with any one specific module and expand their usage into other tools over time.
5. Customers love the platform
This platform of tools has over 182,000 customers, which grew at a 14% year-over-year rate in Atlassian's most recent quarter. But its overall revenue grew faster, at 26% year over year for the same quarter. This shows that customers spend more every year as they adopt more tools and add more users.
6. It has a strong history of growth
Over the last four fiscal years, Atlassian's top line has grown from $457 million to $1.6 billion. This represents a robust compound annual growth rate of 37%. The solid growth was supported by its ever-widening set of products, its focus on product improvement, and strong customer adoption. Atlassian's demonstrated ability to grow over time bodes well for the future, as it plays in a large market.
7. It has a huge market
Management estimates its addressable market is $24 billion based on today's pricing and products. With $1.7 billion in trailing-12-month revenue, Atlassian has only captured around 7% of the market, giving it plenty of room to grow. As it looks forward in the near term, it's eyeing a business with 100 million monthly active cloud users (up 6.6 times) and achieving a $5 billion annual revenue run rate. I have no doubt it will get there.
8. It's got an efficient marketing engine
In the early days of the company, instead of spending its precious cash resources on marketing efforts, Atlassian invested in making its products better and relied on word-of-mouth to grow. Today, with free trials and an effective land-and-expand strategy, its marketing and sales costs run around 19% of revenue, less than most of its software-as-a-service peers.
9. It's investing heavily in its products
A core part of Atlassian's business is its heavy investments in product improvements. It spends a significant 47% of revenue on its research and development teams to focus on product excellence. As a result, customers know that when they purchase a cloud-based subscription they can expect the product will improve over time.
10. It's doubling down on the cloud
Atlassian's cloud-based subscription revenue already accounts for more than 50% of the top line, but that's just the beginning. With its recent announcement to end its on-premise server products, its subscription revenue from cloud-based products will become 100% of the top line by the end of fiscal year 2024 (June 30, 2024).
11. Its cash flow is impressive
Effective cash management is a hallmark of a good business. In Atlassian's case, its 15 fiscal years of positive free cash flow is astounding. For its last fiscal year ending June 30, 2020, its $500 million in free cash flow represented a substantial 31% of total sales.
12. Its balance sheet provides optionality
With a massive $2.2 billion in cash and marketable securities on the balance sheet, the company has considerable optionality to invest in growth. Whether its technology acquisitions, additional investment to accelerate customers' moves to the cloud, or further product enhancement, the company has sufficient funds to enable management to invest as it sees fit.
The bottom line for investors
Atlassian has a timeless mission, a large market opportunity, and smart management to continue to execute on its strong growth trend in the coming years. Investors would do well to add this solid growth stock to their portfolio with the intent to never sell.