This Tech Stock May Be Criminally Underrated

Collaboration software company Atlassian (TEAM -0.30%) crushed its latest earnings report in several categories, but one segment's numbers especially stood out. In this episode of "3 Minute Stocks Updates" on Motley Fool Live, recorded on Feb. 2, Fool.com contributors Brian Withers and Toby Bordelon discuss how the accelerating growth in Atlassian's cloud business is showing that the company's new direction is paying off handsomely.

Brian Withers: Ticker symbol TEAM. Yes, it's TEAM because it's collaboration-based software powering to make teams even more effective. They added 10,000 customers this quarter, up 29 percent year over year. Revenue, even growing faster, 37% driven by subscription revenues, up 64 percent. The company is in the middle of a transition here to the cloud, their server product, which is the old style, install it on premise in your own data center, is being phased out. It only makes up 20 percent of the revenue now from this quarter, down from 30 percent last year, and the server products saw declines of 12 percent year over year. That's actually good for the company because they are withdrawing support here in the next couple of years. The marketplace business, this is a third-party apps business that the company launched just a few years ago. It's becoming a substantial portion of revenue and clocked just short of 50 million for the quarter, up 20 percent year over year. Its data center product, which is all the benefits of the cloud, but still you can have it on-premise allowing more control over updates and if you decide that you want to move to the cloud, it's an easy port over, it's cloud ready. That's the data center product. Grew 83%, showing customers really like this alternative, some of their biggest enterprise customers are moving to this cloud-ready alternative if they're not quite ready to fully commit to a fully cloud experience. Pricing increases go into effect in February for both the server products and the data center products. The server products, they're raising prices up 10% to 25% to encourage folks to get the heck off that platform. Data center, a little more modest at 13% to 15%. They are actually going to raise prices for their flagship cloud services but only 5%, and it's starting in October. By the way, of these 10,000 customers that they added this quarter, 98% of them started with the cloud products. They're seeing very few customers coming into their products that are going to be sunset. Lastly, strong cash flow generation of 198 million representing 29% free cash flow margin. Boom, the stock is up 10% since it released earnings last week, great quarter.

Toby Bordelon: Love that cash flow, Brian. Love that cash flow.

Withers: I thought you'd like that one.

Bordelon: I love cash flow, you know how I am. Look, this server product you talked about, they're ditching. You said it's only 20% of revenue right now, but that's still 20%. Here's my question, Is the cloud growth going to compensate for that loss? Can they move to the cloud fast enough to offset the phaseout of the server products, or you see any issues with that?

Withers: Yeah, that's been a concern when they announced the cloud transition initially about a year ago. Let me show you a couple of charts that will put your mind at ease, Tob. This is their stack of revenue. On the top here is the server business, which is gone down from 150 million down to 135 million. But this cloud business on the bottom is growing much, much faster. You went down 150 to 135, so you lost about 15 million there. But look at the cloud, it's gone from 207 million to 364, almost $150 million added. Really positive trend here. You can see really only one quarter here where quarter-over-quarter growth declined. The other thing that's really exciting for me is when you split out this product, say you look at Q1 '21, this is the year-over-year growth. Year-over-year growth for cloud six quarters ago was 37%, today it's 58%. Data center, 49% to 83%. The key cloud and cloud-ready platforms growth is actually accelerating. This marketplace, this is the third-party apps business, going from 11% to 20%. That's pretty exciting, too. You see the server business at a positive growth rate here, and actually what we want to see is a negative growth rate year over year. Really solid story. You can see the growth rate is accelerating over the last few quarters with the customers just adopting their tremendous cloud platform.