What happened
Shares of Atlassian (TEAM 8.63%) rose 25.6% for the month of January 2023, according to data from S&P Global Market Intelligence. The company behind project tracking and collaboration tools like Jira and Trello saw share prices take a 66.3% haircut in 2022. The stock was spring-loaded for a snappy bounce, which was unleashed by positive macroeconomic developments and accelerated by a couple of bullish analyst notes.
NASDAQ: TEAM
Key Data Points
So what
Atlassian's swan dive in 2022 sprung from investor fears that skyrocketing inflation and federal interest rates will make new debt more expensive. In other words, some of the safeguards that allow companies to take operating risks and grow fast are less effective than they used to be. Therefore, it's more difficult to motivate sky-high valuation multiples for risky stocks.
Those fears applied to Atlassian's stock in recent years. For example, these shares changed hands at the princely valuation of 40 times sales and 121 times free cash flow at the end of 2021. One year later, the stock had calmed down to 10 times sales and 40 times free cash flow -- still expensive, but nowhere near as lofty as the 2021 readings. Given Atlassian's history of dynamite growth, many investors were looking for bullish market signs that could support a return to rising stock prices.
January delivered a few tidbits of positive economic development. The inflation-fighting tactics of 2022 appeared to make a difference in last month's lower inflation readings. As a result, the Federal Reserve slowed down its interest rate hikes. Growth stocks everywhere surged on the news, and deeply discounted names such as Atlassian also posted sharper rebounds.
Meanwhile, a few analysts published bullish research notes on Atlassian last month. Enthusiastic analysts expected the company to deliver second-quarter results above consensus estimates and the midpoint of management's guidance ranges.
Furthermore, Atlassian surprised the Street with a round of significant price increases on Jan. 11. This move landed on the plus side of most analyses.
TEAM Revenue (TTM) data by YCharts
Now what
The second-quarter report arrived on Feb. 2, exceeding expectations by 2.5% in top-line revenues and by 45% for bottom-line earnings. At the same time, Atlassian's board authorized a $1 billion buyback program.
"We continue to make great strides toward our long-term goals, and we're ready to execute with relentless focus in 2023," CEO Mike Brookes said on the earnings call. "We've achieved a ton this quarter, shipping many platform enhancements, and product features that deliver incredible value to delight our customers in the cloud."
So Atlassian's long-term growth story continues, and the company keeps putting its back into driving even more gains in the future. The research and development budget increased by 49% year over year, ensuring that Atlassian's products and services lead the way in 2023 and beyond.
The stock isn't cheap today, trading at 15.6 times sales and 57 times free cash flows, but you're paying a premium price for a high-octane growth stock. Trailing sales have increased by a compound annual growth rate (CAGR) of 35% over the last five years, driven by minimal marketing budgets and compelling word-of-mouth promotion.
The bottom line: If you build a great software package, the customers will come.
