One of the technology sector's most esteemed stocks is workplace-management software company Atlassian (TEAM -0.77%). With a large market opportunity, high growth, enviable profit margins, and highly engaged founders, there's a lot to like about the business. However, even though the winds are blowing mightily on Atlassian's sails, there's ultimately one factor that I believe will be like an anchor on shareholder returns for the foreseeable future.

Why Atlassian is a great business

Atlassian stock started 2022 trading at a price-to-sales (P/S) valuation of 40, which is extremely high and implies the high level of confidence investors have in this company. Rising interest rates have caused valuations to contract and Atlassian's P/S ratio has consequently been cut in half. But a P/S ratio of 19 is still high and suggests investor sentiment remains bullish.

Atlassian's mission is to empower workplace collaboration from anywhere in the world. Both technical workers (think software developers, etc.) and non-technical workers (think marketing teams, etc.) use the company's products. This market is huge and management believes 2.2 million companies globally could ultimately benefit from Atlassian products.

Atlassian is already making significant headway with more than 242,000 customers as of the end of its fiscal 2022 (June 30). For perspective, it had just 159,000 customers at the end of its fiscal 2020. Customer growth is the primary reason full-year revenue is up 74% from the end of fiscal 2020 to the end of fiscal 2022.

TEAM Revenue (TTM) Chart

TEAM Revenue (TTM) data by YCharts

Importantly, 79% of Atlassian's revenue in the fourth quarter of its fiscal 2022 was subscription-based, giving future revenue a high degree of visibility. 

Moreover, Atlassian's customers are expanding how much money they're spending by adding additional products over time. This is measured with a metric called net expansion rate -- a rate of 100% means customers spent the same, on average, this year as last year. In Q4, Atlassian's net expansion rate for cloud-based revenue was 130%, suggesting its customers are happy enough with these services to consistently spend more on the platform.

Finally, because it's primarily a cloud-based software business, Atlassian's profit margins are stellar -- for example, the company's gross margin in fiscal 2022 was over 83%. 

The $10 billion goal

Not satisfied with past success, Atlassian is pushing toward a goal of $10 billion in annual revenue compared to $2.8 billion in its fiscal 2022. Importantly, management believes it can make this 260% top-line jump with the products it already has -- it doesn't need to build new products or acquire other companies to reach its goals. 

Reaching $10 billion in revenue won't take more products but it will take more people. Accordingly, Atlassian aims to employ a whopping 25,000 people, up from over 8,800 at the end of Q4. A roughly 300% jump in its employee base is big but the company hasn't avoided aggressive hiring in the past, as the chart shows.

TEAM Total Employees (Annual) Chart

TEAM Total Employees (Annual) data by YCharts

However, it's worth noting that Atlassian is doing the opposite of what the tech giants are doing right now. For example, Meta Platforms reportedly has a hiring freeze in place. Meanwhile, Microsoft recently laid off 1,000 workers. The point is, these highly profitable titans are prepping for a slowdown in the global economy. But Atlassian contrarily views this as an opportunity to scoop up fresh talent and chase its $10 billion dream.

Co-founders and co-CEOs Mike Cannon-Brookes and Scott Farquhar own more than 100 million shares of Atlassian combined (Class A and Class B shares), which is nearly half of the company. And they have approximately 90% of the voting power. Founders commonly swim upstream and pursue growth. And with this much power, nothing can stop Cannon-Brookes and Farquhar from zigging here while Atlassian's competitors are zagging. 

Why I won't buy Atlassian stock

This leads me to why I won't buy Atlassian stock. In fiscal 2022, the company had more than $700 million in stock-based compensation (SBC) for its current employee base -- a whopping 25% of total revenue. Virtually all growth companies use stock to incentivize workers. But 25% of revenue is extraordinarily high.

Over time, SBC can act as an anchor on shareholder returns because it dilutes per-share value. And shooting for 25,000 workers over the next several years, SBC is only poised to trend higher for Atlassian. Couple this rising SBC expense with an already above-average valuation, and I believe it will be challenging for Atlassian stock to beat the market even if it hits its $10 billion goal.

Of course, many believe the quality of Atlassian's business overrides my primary concern with Atlassian as an investment -- a view I respect. However, with other quality stocks to choose from, it's a risk I personally prefer not to take.