Shares of productivity and collaboration software provider Atlassian (TEAM 3.14%) plunged nearly 30% on Friday following a quarterly report that did not sit well with investors. While revenue grew by 31% in the fiscal first quarter ended Sept. 30, the company is starting to feel the effects of a difficult economic environment.

The rate at which users of free plans are converting to paid plans was already deteriorating, and that trend worsened in Q1. One of the main ways Atlassian wins new customers is to offer fairly generous free plans for its software. If that free customer expands usage and runs up against the limits of the free plan, they can upgrade to a paid plan and join nearly 250,000 paying Atlassian customers.

On top of the slowdown in customer acquisition, existing paid customers are pulling back on growing their spending. With layoffs and hiring freezes making headlines, this isn't too surprising. A business focused on controlling costs will likely be a bit stingier when it comes to adding seats.

Friday's rout brings the total decline in Atlassian's stock price to 73% since peaking in late 2021. Is Atlassian a buy at such a depressed level? There's one major pro and one major con to consider.

Reason to buy: Mission-critical software

Atlassian's core products -- which include issue tracking and project management tool Jira, visual project management tool Trello, collaboration and shared workspace tool Confluence, and a few others -- are mission-critical for companies that have adopted them broadly. If a software company uses Jira to develop and maintain all its products, it's not going to rip that out and switch providers unless there's a very good reason.

Selling mission-critical software doesn't provide full immunity from economic downturns. Since Atlassian's pricing is based on the number of users, a customer reducing the size of its workforce will also be looking to reduce the number of users it pays for. Other customers may defer plans to adopt additional Atlassian products or to roll out software to additional employees. The net result of all this is slower growth for Atlassian.

Atlassian's financial results will probably get worse before they get better, especially if global economies enter a recession next year. But selling software that many customers need is a lot better than selling software that can be easily swapped out or dropped entirely. Atlassian should be able to weather this storm, although not without some pain.

Reason to sell: A sky-high valuation

Even down more than 70%, Atlassian is still an expensive stock. The company is valued at roughly $31.5 billion, or 11 times fiscal 2022 revenue.

A year ago, a price-to-sales ratio barely above 10 would have seemed cheap for a growing software company like Atlassian. What investors are willing to pay for a stock is a function of a lot of things, including prevailing interest rates. Going from ultra-low rates last year to rapidly rising rates this year has certainly thrown some cold water on the frothiest parts of the stock market.

Other software stocks have been hit much harder than Atlassian. Messaging platform Twilio, for example, now trades for around twice annual sales. How much further could Atlassian stock fall? The floor is a long way down.

The good news is that Atlassian the company is strong. It's free cash flow positive, although not so much if you back out stock-based compensation, and its spending is more disciplined than that of many other software companies. Atlassian spends more than twice as much on research and development (R&D) than it does on sales and marketing, putting improving its products ahead of boosting sales in the short run. And R&D spending can be cut if necessary to shore up the bottom line.

Verdict: Buy at a cheaper price

Atlassian is a good company, but the stock is just too expensive to consider seriously. Atlassian isn't profitable on a GAAP basis, and there's still a lot of uncertainty over how well its business will hold up in a recession. A double-digit price-to-sales ratio will be tough to maintain in this environment, especially if Atlassian's growth rate slows further in the coming quarters.

Put Atlassian on your watchlist, but hold off until the stock is more reasonably priced.