Atlassian (TEAM -0.22%) has generated massive gains for its early investors since its initial public offering (IPO) on Dec. 10, 2015. The Australian software company listed its shares at $21, which popped 32% to $27.67 on the very first trade.
Atlassian's stock eventually closed at an all-time high of $458.13 last October, which means a modest $3,000 investment in its IPO would have blossomed to more than $65,000 in less than six years.
However, Atlassian's stock subsequently tumbled back to about $230 as rising interest rates drove investors away from pricier tech stocks. But even after that painful decline, that initial $3,000 stake would still be worth nearly $33,000 today.
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Could Atlassian still have room to run after growing from a $4 billion company to a $60 billion one in just under seven years? Let's review its business model, growth rates, and valuations to find out.
What does Atlassian do?
Atlassian's cloud-based ecosystem houses two main products. Jira, which was launched in 2002, enables companies to plan, track, and release products. Confluence, which was released in 2004, enables employees to collaborate and share documents with each other.
At the time of its IPO, Atlassian served about 48,000 customers and 5 million monthly active users (MAUs). Today, it serves more than 200,000 customers, including 83% of the Fortune 500, and 10 million MAUs.
How fast did Atlassian grow?
Between fiscal 2016 and fiscal 2022 (which ended this June), Atlassian's revenue rose from $457 million to $2.8 billion, while its adjusted net income grew from $71 million to $434 million. Both its revenue and adjusted net income increased at a compound annual growth rate (CAGR) of 35% during those six years. Analysts expect its revenue to reach $6.1 billion by fiscal 2025, which would represent a CAGR of 29% from fiscal 2022.
Atlassian's annual free cash flow (FCF) rose from $129.5 million in fiscal 2016 to $764 million in fiscal 2022, even as it acquired more companies like Trello, OpsGenie, Agilecraft, Code Barrel, Halp, Mindville, and Chartio. Those acquisitions expanded its presence in the help desk, digital workflow, automation, data visualization, and IT service management markets.
However, those purchases -- along with its stock-based compensation -- have kept Atlassian unprofitable under generally accepted accounting principles (GAAP) since its IPO. By that metric, the company racked up a net loss of $614 million in fiscal 2022, and analysts expect it to remain unprofitable through fiscal 2025. All that red ink caused Atlassian's stock to lose its luster as rising interest rates punished unprofitable companies.
Mind the competitive threats
In its latest annual report, Atlassian admitted that its markets are "fragmented, rapidly evolving, highly competitive, and have relatively low barriers to entry." It names Microsoft, which competes against Jira with Github and Confluence with Teams, as a major competitor. It also names ServiceNow and Asana as rivals in collaboration and digital workflow services, and Monday.com as a work management software competitor.
Atlassian also points out that Alphabet's Google and International Business Machines provide similar services in their larger collaboration and productivity suites. It admits that a bundling and pricing war among all these platforms could make it more difficult to "compete effectively" in the future. All that competition could limit Atlassian's pricing power, force it to acquire more companies (which could further fragment its business), and prevent it from turning a profit.
Mind the valuations
At its all-time high last October, Atlassian was valued at $116 billion -- or a whopping 41 times the sales it would generate in fiscal 2022. Today, it's valued at nearly $60 billion, or more than 16 times this year's sales.
That price-to-sales ratio is still rich for a cloud-based software company that is expected to generate less than 30% sales growth over the next few years. By comparison, ServiceNow, which is expected to grow its annual revenue at a CAGR of 24% from 2021 to 2024, trades at 11 times this year's sales. Monday.com, which is expected to grow its annual revenue at a CAGR of 45% from 2021 to 2024, trades at 12 times this year's sales. Therefore, I wouldn't be surprised to see Atlassian shed another quarter of its market cap before it's considered reasonably valued.
Don't expect more multibagger gains (for now)
Assuming Atlassian generates $6.1 billion in revenue in fiscal 2025 but its price-to-sales ratio cools off to 12, the company could be worth about $73 billion. That would represent a modest gain of about 20% from its current levels -- so investors shouldn't be expecting it to replicate its big post-IPO gains anytime soon.
Atlassian has had a great run since 2015, but investors should expect analysts to more closely scrutinize its competitive threats, ongoing losses, and premium valuation in this tough market for imperfect growth stocks.
