A decade ago, most investors wouldn't have mentioned Atlassian (TEAM -0.30%) and Microsoft (MSFT -2.45%) in the same breath. Atlassian, which is based in Australia, provides software which helps employees plan their product launches and collaborate with each other. Microsoft, one of America's top tech companies, develops a much wider range of enterprise software. Its top products include its Windows and Office products, as well as its cloud-based Azure and Dynamics services.
But in recent years, Microsoft has emerged as one of Atlassian's most formidable competitors. Microsoft's Azure DevOps and GitHub target Atlassian's Jira in the product planning market, while Microsoft Teams is chasing Atlassian's Confluence in the cloud-based collaboration space. Should investors still buy Atlassian as a growth play in this tough market, or should they buy Microsoft as a more balanced play on the same secular trends?
Image source: Getty Images.
Atlassian's slowing growth and red ink are worrisome
At the time of its IPO in 2015, Atlassian served more than 48,000 customers and 5 million monthly active users (MAUs). Today, it serves nearly 250,000 customers, including 83% of the Fortune 500, and 10 million MAUs. Between fiscal 2016 and fiscal 2022, which ended this June, Atlassian's revenue and adjusted net income both increased at compound annual growth rate (CAGR) of 35%. Its stock soared from its IPO price of $21 to about $150 today.
But like many other high-growth tech stocks, Atlassian now faces concerns about its slowing growth, its lack of profits on a generally accepted accounting principles (GAAP) basis, competitive threats, and its valuation. Its revenue rose 34% to $2.8 billion in fiscal 2022, but analysts expect just 24% growth this year as macro headwinds hit enterprise spending. The rise of Microsoft Teams, which is integrated with many of the tech giant's other services, could exacerbate that slowdown.
That deceleration wouldn't be too worrisome if Atlassian were firmly profitable. But it only slightly narrowed its GAAP net loss from $696 million in fiscal 2021 to $614 million in fiscal 2022, and it ended its latest quarter with a high debt-to-equity ratio of 6.0. All that red ink and high leverage will discourage the bulls from buying as long as interest rates continue rising.
On the bright side, Atlassian won't go bankrupt anytime soon: It's still profitable by non-GAAP measures and it ended its latest quarter with $1.5 billion in cash, cash equivalents, and short-term investments. Its stock might not seem cheap at nine times next year's sales, but it looks a lot more reasonably valued than it did last October -- when it was valued at a whopping 41 times the revenue it would go on to generate in fiscal 2022.
Microsoft is losing its luster as an evergreen stock
Under CEO Satya Nadella, who took the helm in 2014, Microsoft transformed its desktop-based software into cloud-based services and mobile apps. It also expanded Azure into the world's second largest cloud infrastructure platform after Amazon Web Services (AWS). Those bold steps enabled Microsoft to grow its annual revenue at a CAGR of 11% between fiscal 2014 and fiscal 2022, which ended this June. Its non-GAAP EPS increased at a CAGR of 17% during those eight years, and it remains firmly profitable on a GAAP basis.
Those consistent returns, along with the ongoing expansion of its Surface and Xbox businesses, changed Microsoft from a dusty old tech stock to an evergreen growth play again. Over the past eight years, its stock skyrocketed more than 440% as the S&P 500 advanced about 95%.
But like Atlassian, Microsoft faces a near-term slowdown as enterprise customers rein in their spending and the rising dollar gobbles up its overseas sales. In the first quarter of fiscal 2023, its revenue rose only 11% year over year -- representing its slowest quarterly growth in five years. Analysts expect its revenue and adjusted EPS to rise just 7% and 4%, respectively, for the full year, compared to its 18% revenue growth and 16% adjusted EPS growth in fiscal 2022.
The most troubling issue with Microsoft's slowdown is that Azure, which had driven most of its growth over the past several years, is losing its momentum. That closely watched segment's revenue rose only 35% year over year in the first quarter, compared with its 50% growth a year ago. Its planned acquisition of Activision Blizzard, which was intended to significantly expand its Xbox gaming business, is also on thin ice as a growing number of regulators challenge the deal.
These challenges have caused Microsoft to lose its luster as an evergreen investment, but it's still reasonably valued at 26 times forward earnings and pays a decent forward yield of 1.1%. As for its balance sheet, it has a manageable debt-to-equity ratio of 1.1 and was still sitting on $22.9 billion in cash and equivalents at the end of its latest quarter.
The winner: Microsoft
Atlassian is still growing, but it's simply not the kind of stock you want to own in this tough market. Microsoft isn't a perfect investment either, but its broader diversification, superior scale, consistent profits, and healthier balance sheet all make it a much better bear market buy.
