What happened
Shares of workflow and productivity software company Atlassian (TEAM -0.22%) were falling hard today, down as much as 6.9% in morning trading before recovering to a 4% decline as of 2:32 p.m. ET.
While the overall tech sector was mostly down to start the year, Atlassian's outsized decline was the result of analysts lowering their price target on the stock Tuesday morning.
So what
This morning, a Piper Sandler analyst lowered his price target on Atlassian, from $148 to $140, while keeping a "neutral" rating on the stock, according to The Fly. This was a disappointing start to 2023, as Atlassian had already fallen 66.6% over the past year.
Atlassian is one of several high-growth software stocks that are currently in the penalty box with investors amid higher interest rates and slowing growth. On its last earnings report, Atlassian cut its fiscal 2023 guidance, as it noted prospective customers were reeling in spending amid tighter financial conditions and recession fears.
The lethal combination of higher interest rates and slowing growth is hitting high-growth stocks especially hard, especially those that are currently losing money on their bottom line. While Atlassian grew revenue a somewhat impressive 31.5% last quarter, it also posted operating losses of $34 million, flipping from a GAAP operating profit in the prior-year quarter to a loss in 2022 as spending surged.
Now what
Although slowing growth and profits flipping to losses caused investors to punish Atlassian over the last few months, the fact that Atlassian had earned a profit in 2021 indicates it could be profitable if it desired. However, that may come at the expense of future growth.
Yet with investors having no patience for companies that aren't cutting costs at the current uncertain moment, and with sell-side analysts mostly forecasting six to 12 months rough going ahead, it's perhaps no surprise that shares remain under pressure in the new year. That's especially true as shares still trade at over 10 times sales.
Thus, high-growth SaaS names like Atlassian could remain under pressure for the foreseeable future, as higher rates put a lid on valuations of growth stocks, and as investors remain wary of buying before a recession hits.
If the economy does go into a recession, inflation tumbles, and/or the Federal Reserve stops raising rates and begins to lower them, software stocks could find their footing. Yet until one or all of those things happen, Atlassian shares, as well as those of its unprofitable software peers, will probably continue to struggle in the near term.
