Earnings season is kicking off, and we have already seen strong quarters from some of the biggest companies like Microsoft and Apple. Investors who own tech stocks have a pivotal earnings season this quarter, however. Many growth stocks have been crushed over the past three months, and this earnings season could turn things around.
One of the first cloud stocks that reported earnings this season was Atlassian (TEAM -3.46%), and it did not shy away from greatness. The company posted strong results on just about every aspect of its business, which sent shares up nearly 10% on Friday, January 28. This brought the company to a market capitalization of $80 billion. So is this team management tool expert still worth buying if you want to see multi-bagger returns over the next decade? Let's find out.
A blowout quarter
Atlassian has a suite of workflow management tools that make teams more efficient. Its tools like Jira Work Management, Trello, and Confluence all allow teams to collaborate, build, and create products easily together. Just as you would expect, the demand for collaboration tools hasn't disappeared, and Atlassian benefited immensely from that. The company grew its Q2 2022 -- which ended December 31, 2021 -- revenue by 37% year-over-year to $688 million, and decreased its net loss to $77 million, from $622 million in the year-ago quarter. Both of these results handily beat Wall Street expectations as well.
Thanks to exceptional cloud adoption, Atlassian's revenue growth accelerated this quarter to 37%, having previously been in the high-20%-to-low-30% range. Cloud revenue grew 58% year-over-year, which marked a strong acceleration in growth from Q1 2022, when Atlassian posted 53% year-over-year revenue growth. This quarter was the fastest cloud growth for any quarter in the past six quarters, and cloud revenue now makes up 53% of revenue, compared to 46% in the year-ago quarter.
The company was not profitable this quarter -- its net loss margin was roughly 10% -- but the company did report strong cash generation. Atlassian had over $197 million in free cash flow, which grew 10% year-over-year. Now the company has a free cash flow margin of almost 29% -- meaning for every $1 it makes in revenue, it generates $0.29 in cash profit. This impressive performance, combined with $900 million in cash and equivalents on its balance sheet, means that investors should not be incredibly worried about Atlassina's unprofitability.
The company has been investing heavily in research and development to establish itself as the leader in this competitive industry, which is why the company has remained unprofitable. However, these investments are paying off: Atlassian has become a leader in the Enterprise Service Management space, according to Forrester's Wave. Now Atlassian is one of just two top dogs in the market, up against ServiceNow (NOW -2.52%).
Scratches on the armor
It wasn't all sunshine and rainbows in this quarter. The Chief Technology Officer, Sri Viswanath, announced his departure at the end of the 2022 fiscal year. This exit is so that Sri can pursue other opportunities, and with a studded resume for his work at Atlassian, he has the potential to become a big name in the tech space. Since joining in 2016, Viswanath was one of the core builders of Atlassian's cloud-based solutions, which now make up the core of its business.
Shares of Atlassian are still very expensive. They dipped roughly 30% -- in line with the tech sell-off -- but not as much as many other high-flying tech stocks. Shares currently trade at roughly 36 times sales, which is much higher than most stocks in this space. ServiceNow, for example, trades at 19 times sales.
Is it a buy?
Despite the company's high valuation and high market cap, Atlassian is worth buying right now because it is executing on all fronts. The company's growth strategy is and will continue to be in the cloud for the foreseeable future, and this quarter is a great example of what investors should look for in Atlassian's coming quarters. With accelerating growth in both total revenue and cloud revenue, it's easy to see that customers are rapidly adopting Atlassian's cloud products and expanding their relationships with the company.
The company is also flexing its brand name and pricing power by increasing its prices, which shows how dominant Atlassian is in this space as a leader. The company is eyeing an addressable market of $24 billion, and with just $2.4 billion in trailing twelve-month revenue, it has plenty of room to expand. With its industry leadership and strong execution, I think Atlassian will be able to capitalize on its position.