Finding growth in the stock market isn't easy when all the benchmark indexes are deeply in the red for the year. That's especially true for the tech sector, which currently leads the decline, with the Nasdaq-100 index losing 28% of its value in 2022 (so far).
But Wall Street still predicts substantial upside in some pockets of the market. Companies that serve individuals are suffering the most right now, because household finances are constrained by high inflation and rising interest rates. Many companies that serve business customers, on the other hand, are still growing nicely.
Software giant Atlassian (TEAM 1.28%) is one of them, and despite its stock declining by 64% this year, one Wall Street investment bank thinks it could more than double over the next 12 to 18 months. Here's why.
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Atlassian is zigging while the tech sector zags
The technology sector is making headlines this year for all the wrong reasons. Many companies are struggling to find growth, and it's hurting their financial performance so much that cutting costs is one of the only ways to stem the bleeding. The largest cost they've been trimming, unfortunately, is staff -- according to an estimate by Crunchbase, over 73,000 tech workers have been laid off in the U.S. so far this year.
But that's not the case at Atlassian. It hired 989 staff in the recent first quarter of fiscal 2023 (ended Sept. 30), which was actually an acceleration from the 634 it hired in the fourth quarter of fiscal 2022. Most of the Q1 additions were in research and development roles, which are critical to maintaining the company's edge as a provider of collaborative software tools.
Atlassian's flagship platform is Jira, which helps software development teams manage and deliver projects more cleanly and efficiently, whether they're all in the same office or working remotely. But it has evolved from its roots to become a collaborative bridge for all technical and non-technical teams -- in fact, 46% of current Jira users aren't in technical roles at all.
Confluence is Atlassian's other stand-out offering. It helps connect all departments in an organization to plan, discuss, and launch everything from new products to marketing campaigns.
As of Q1, Atlassian was serving a record-high 249,173 business customers, with an increase of 15% year over year.
Atlassian's future is in the cloud
Atlassian is currently on a mission to convert all of its on-premise customers to the cloud. After all, the company has been around for 20 years, and many businesses using its portfolio of software tools have been slow to shift their operations online. It's a fast-growing opportunity, considering Atlassian's cloud revenue jumped by 49% in Q1.
Atlassian believes this shift is critical to its goal of eventually generating $10 billion in annual revenue. For context, it has delivered just shy of $3 billion over the past four quarters, and over half of that was cloud revenue, so it has a long runway for growth.
Cloud-based products require no maintenance or upgrades and are more structurally flexible to allow for things like remote work and task management. The benefits are so clear that Atlassian's existing cloud customers have a net expansion rate of 130%, which means they're spending 30% more money with the company in each passing year.
But how big is Atlassian's addressable market, exactly? The company estimates there are more than 800,000 businesses out there with technical teams, and over 2.2 million businesses with 10 or more knowledge workers on the books (executives and IT specialists, for example). All of them could benefit from Atlassian's software products, and remember, it's only serving 249,173 of them right now.
The kicker is that 99% of new customers joining Atlassian today are starting with cloud-based options, which could be a significant tailwind for the company in the long run as each customer grows more valuable over time.
Wall Street is bullish on Atlassian stock
The Wall Street Journal currently tracks 25 analysts who cover Atlassian stock, and not a single one recommends selling. 15 of them have given it the highest possible buy rating, two rate the stock overweight (bullish), and the remaining eight are neutral.
Atlassian stock has dipped by 64% this year to trade at $124.13 per share, but the consensus price target among the above analysts stands at $200.65, which represents 61% of possible upside.
But Wall Street investment bank Goldman Sachs is particularly bullish, betting the stock could soar to $265 over the next 12 to 18 months. That would imply a potential gain of 113% from here.
Given Atlassian's recent strong operating performances in the face of a slowing economy, plus its significant growth opportunity in the cloud, it might make sense for investors to build a position while the stock is trading at such a steep discount.
