Software companies have grappled with challenging economic conditions over the last 18 months. High inflation and rising interest rates pressured household budgets, and the knock-on effects forced businesses to manage their expenses carefully. That means hiring fewer employees and investing less money in software tools.
Workplace collaboration specialist Atlassian (TEAM -9.56%) has felt those effects, and its stock has declined by 58% from its best-ever levels set in 2021. However, the company is using this period to expand its product portfolio through in-house development and acquisition.
On Oct. 12, Atlassian announced plans to acquire video messaging platform Loom for $975 million as it looks to capitalize on remote work trends. The two companies are a great fit, and I'll explain why the deal is another reason to buy Atlassian stock while it's still beaten down.
Image source: Getty Images.
Atlassian represents the future of work
Atlassian built a business on connecting organizations. Two of its core products, Jira and Confluence, are designed to help teams collaborate on projects and across departments. The onset of cloud computing made Atlassian's mission more important than ever. Now, workers can be stationed anywhere in the world and still make valuable contributions.
Jira is a tool designed primarily for software developers. It puts all aspects of a project in one place so teams can manage timelines, create new tasks, track bugs, and deploy fixes without losing sight of the big picture. Similarly, Confluence is a virtual workspace suitable for all employees within an organization. It can be used to centralize information, share content, and coordinate important decisions with management and staff.
Both Jira and Confluence are now cloud-first platforms, so all employees have the same live user experience, even if they're located in different countries. Atlassian's acquisition of Loom adds a new dimension to that experience. It will allow workers to create videos of their workflows and attach them to tasks in Jira and Confluence. This could save substantial amounts of time on collaborative phone calls and even prevent development mistakes thanks to the ability to deliver crystal-clear instructions through video.
Atlassian has also been working on generative artificial intelligence (AI) tools to supercharge its product portfolio. Its new Atlassian Intelligence virtual teammate leans on the enormous amount of data and experience amassed by the company over two decades, giving each customer a tailored experience. It could potentially produce more useful outputs than a generic chatbot accessed through a third party.
Atlassian is feeling the effects of the broader economic conditions
Despite recent challenges in the broader economy, Atlassian continues to grow its customer base each and every quarter, albeit at a slowing pace. It finished fiscal 2023 (ended June 30) with over 262,000 businesses on board, an increase of 8% year over year. By comparison, that growth rate was 18% at the end of fiscal 2022.
However, Atlassian continued to add high-spending customers at a much faster rate, which signals the importance of collaboration software within larger organizations. It ended fiscal 2023 with 353 customers spending over $1 million per year, up 52% compared to the same time last year.
The cloud continues to be a critical part of Atlassian's business and now makes up more than half of the company's total revenue. When Atlassian was founded in 2002, businesses were deploying software locally (on-premises), so the company is still in the process of migrating all those long-standing customers to the cloud while also investing in the acquisition of new customers.
Atlassian generated $3.5 billion in total revenue during fiscal 2023, an increase of 26% year over year. Cloud revenue, however, grew by 38% -- a much slower pace than fiscal 2022 (57%) as macroeconomic factors weighed on the company. However, management said the rate of deceleration had started to moderate in the fourth quarter.
Why Atlassian stock is a buy now
According to an investor presentation from last year, Atlassian wants to be around for more than a century. In the nearer term, the company is eyeing an addressable market that includes 2.2 million businesses with 10 or more knowledge workers (software engineers, lawyers, and scientists, for example).
Atlassian believes $10 billion in annual revenue is a real possibility as it continues to penetrate that market. If its 26% growth rate from fiscal 2023 persists, it will take only another five years to get there. But as the company continues to expand its product portfolio, it's also opening the door to a potential growth acceleration.
Take its acquisition of Loom, for example. That platform has 200,000 businesses on board, many of which have come to Loom to enhance connectivity between their teams. They could be rich targets for Atlassian, especially after it integrates Loom into its own platforms and proves how powerful the synergies could be.
With Atlassian stock down 58% from its all-time high, this could be a great entry point for investors as the company's next chapter unfolds. If it does achieve $10 billion in annual revenue within the next five years, investors will probably be glad they bought in today.
