Shares of work management software company Atlassian (TEAM -4.18%) dropped about 30% on Friday, plummeting to a three-year low. This came after the company reported financial results for the first quarter of its fiscal 2023. 

Contrary to the market's decisively negative reaction, headline numbers were good for Atlassian. Revenue of $807 million came in at the high end of guidance, and the company gained more than 6,500 customers during the quarter.

However, management cut some of its guidance for the full year because of problems brewing under the surface. For many investors, this was a clear signal to sell the stock. However, there's far more to the long-term story than this.

Why investors are bailing on Atlassian stock

Atlassian has long enjoyed a premium valuation. Even down more than 70% from its all-time high, the stock still trades at a price-to-sales (P/S) ratio of 11, which many would contend remains pricey.

This premium valuation was driven by two main factors: impressive revenue growth and strong investor confidence in the company. For perspective, its 31% year-over-year top-line growth last quarter was one of its poorest showings as a public company. However, 31% growth is nothing to sneeze at -- most companies would love to grow this fast.

Here was the shocking development in the first quarter: Atlassian trimmed its full-year revenue guidance. The company is moving its customers toward cloud subscription products. Three months ago, management said cloud revenue would grow 50% in fiscal 2023 and again in fiscal 2024. Now, management is expecting 40% to 45% growth in fiscal 2023 with no updates to fiscal 2024 in the latest outlook.

By lowering guidance, Atlassian management signaled slowing growth ahead and shook investors' confidence in the future. By touching both of these factors, investors are bailing on the stock.

And Wall Street is bailing on Atlassian as well. For example, Piper Sandler analyst James Fish previously rated Atlassian stock as "overweight". But today, Fish lowered his rating to neutral and lowered his price target by a whopping 48% to $148 per share, according to The Fly.

How Atlassian is facing its problem

To further clarify the problem for Atlassian, it sells software products to enterprises, not consumers, and business for these enterprises is slowing. Management shared that companies are increasingly willing to stay on Atlassian's free tier instead of upgrading to unlock paid features. 

Moreover, Atlassian's paying customers pay per seat -- in other words, they pay based on the number of employees using the service. However, many technology companies aren't growing their employee base at all right now, and some are even laying off workers. These trends are affecting enterprises of all sizes -- even Apple and Amazon have announced hiring freezes, and Microsoft has let some people go. Meta Platforms will reportedly join in announcing layoffs soon.

Not even the largest technology companies in the world are immune from a slowdown in the global economy. How much more are Atlassian's more than 249,000 customers affected by macroeconomic headwinds? When these customers don't grow their employee count, they obviously don't pay for more seats on Atlassian products.

In other words, Atlassian's primary problem isn't the result of a failure on its part. Rather, its customers are hurting and consequently spending less money.

Facing a slowdown, most companies choose to cut back on growth plans. However, Atlassian is doing quite the opposite. It believes it can reach $10 billion in annual revenue in coming years, up from $3 billion in trailing-12-month revenue. And it views the broad economic slowdown as its key opportunity to get ahead.

Specifically, Atlassian believes it can dominate its market by hiring the best people. And whereas competitors are cutting spending on their workforces, Atlassian is hiring. Making this point in the recent earnings call, co-founder and co-CEO Scott Farquhar said, "Our experience is that we can come out really strongly on the other side by selectively picking up staff that other people are letting go."

So Atlassian fully intends to continue investing back into its business throughout this downtrend. To be perfectly clear: This stock isn't for every investor. For starters, the company's investments will likely strain profit margins and have negligible near-term payoffs. Furthermore, it risks building up too fast if the economy worsens. Therefore, there could indeed be more downside ahead for Atlassian stock.

However, this doesn't necessarily make Atlassian stock a sell. To the contrary, by playing the long game, management may be placing the business in a place to take market share once economic conditions rebound.

Therefore, if you believe in Atlassian's products and market opportunity -- and with the stock trading at its cheapest P/S ratio since 2016 -- now may be time to take another hard look at the stock.