It's pretty rare for employees to work on projects by themselves. Instead, teams are usually assembled to tackle projects. But how these teams communicate, keep track of progress, or delegate tasks can be difficult, especially if team members don't work in the same building (or country). That's where Atlassian's (TEAM 2.15%) software comes into play. The company's mission is "to help unleash the potential of every team," and it does that through its different collaboration software offerings.

Atlassian's stock has been stellar since its initial public offering (IPO), up nearly 400% since 2015. However, the stock was caught up in the tech hype of 2020 and 2021 and has tumbled 70% from its all-time high.Has Atlassian's stock fallen enough to be buy-worthy? Or does it have some ways to go?

Rising expenses overshadow strong growth for Atlassian

Like many software companies, Atlassian used to sell its licenses annually, but a customer could continue to use the older iteration without paying for a new license. However, Atlassian is moving toward a subscription approach and will end support for all server licensees in February 2024.By moving to this business model, Atlassian expects to generate more revenue from each customer.

That bodes well for the future, but there's still a lot of work to be done. Only one-third of customers have migrated to the cloud. Still, Atlassian is producing solid growth numbers in the meantime. Revenue in its first quarter of fiscal year 2023 (ending Sept. 30) rose 31% YOY (year over year) to $807 million. However, Atlassian wasn't profitable, and its margins were trending in the wrong direction.

Chart showing fall in Atlassian's quarterly operating margin since early 2021.

TEAM Operating Margin (Quarterly) data by YCharts

Despite being profitable from an operating margin standpoint last year, Atlassian has yet to post an operating profit in 2022. It's not like Atlassian's operating expenses rose slightly compared to its 31% revenue growth; they exploded higher.

Operating Expense YOY Growth SBC YOY Growth
Research and development 47% 71%
Marketing and sales 61% 60%
General and administrative 59% 83%

Data source: Atlassian. Note: SBC = Stock-Based Compensation.

That's some serious undisciplined spending by management, but it's coming at the cost of shareholders. With stock-based compensation rising massively, the rate of shareholder dilution increases.

Chart showing Atlassian's shares outstanding rising since 2018.

TEAM Shares Outstanding data by YCharts

When each share owns less of the company, it's a similar action to how inflation affects the dollar. This harms long-term shareholder returns, but if the company grows fast enough, it offsets the stock dilution.

So are there enough positives to purchase Atlassian stock?

The stock trades at a reasonable price

While I spent a lot of time harping on Atlassian's rising expenses, few companies haven't had significant expense growth over the past few quarters. The 31% revenue growth rate is impressive and outpaces many software companies. Revenue is projected to proliferate over the long term, too: Wall Street analysts estimate Atlassian's fiscal year 2023 (ending June 30, 2023) growth at 24.3% and FY 2024's growth at 24.6%.

The stock also trades at 12 times sales, a slight premium to another software stock, Adobe (9 times sales). Considering how quickly Atlassian's revenue is slated to grow over the next two years, this premium isn't concerning.

As an investor, the biggest thing I'm watching is expenses. The growth needs to slow down, and soon, but management is already on top of it. In Atlassian's conference call, CFO Joe Binz stated they are reducing discretionary spending and moderating the headcount growth during the second half of its fiscal year. This is a step in the right direction, but it may not be enough to turn an operating profit.

I think Atlassian's stock is firmly positioned for the long term, but may experience some short-term uncertainty due to its unprofitability. The revenue growth is there for it to be an outstanding stock, but profits need to follow. Therefore, I think investors are safe establishing a smaller position in the stock, but should avoid taking a significant position until it can showcase consistent profitability.