Artificial intelligence (AI) could be one of the most transformative technologies in history. Goldman Sachs believes it could add $7 trillion to the global economy over the next decade, and that's conservative compared to other estimates. Ark Investment Management, for example, puts that number at $200 trillion by 2030.
Nearly every technology company is trying to capture a slice of that enormous pie, but some are better positioned than others. Atlassian (TEAM -9.56%) has a 20-year track record of helping businesses boost productivity through its collaborative software platforms like Jira and Confluence.
Now, the company is using that experience to add AI into the mix. Here's why Atlassian could be a great AI stock to buy this year (and beyond), especially because it currently trades at a 54% discount to its all-time high.
Image source: Getty Images.
Introducing Atlassian Intelligence
Jira and Confluence are Atlassian's flagship products. Jira is a collaboration platform designed to help software developers build workflows, track bugs, and ship new updates. However, it's increasingly being used by non-technical staff to manage other types of projects.
Confluence, on the other hand, was designed to be an organization-wide digital collaboration platform where employees can brainstorm ideas and strategies. They can even create dedicated workspaces for specific departments, so content is neatly segmented.
Atlassian has embedded Atlassian Intelligence into Jira and Confluence to make organizations even more productive. It's powered by a mix of the company's own AI models and OpenAI's latest technology.
It can draft content, summarize text, serve as a virtual agent for employees and customers, and power an advanced search feature so users can quickly find information about internal projects.
In the recent fiscal 2024 second quarter (ended Dec. 31), Atlassian Intelligence moved out of the beta phase, making it available to the company's 302,000 customers.
Atlassian also acquired Loom last year to add more depth to its platforms and accelerate its AI efforts. It's a video messaging tool that allows employees to create clips they can attach to workflows in Jira and Confluence. So, rather than relying on text-based explanations, workers can get their instructions across in detailed videos.
Loom features a series of AI tools that can automatically summarize videos, remove silent pauses with a single click, and time-stamp parts of the video with chapter labels.
Atlassian is sacrificing some growth to progress toward profitability
Like most technology companies, Atlassian typically invests heavily in growing its customer base and its revenue, even at the expense of generating a profit. But given the challenging economy, with interest rates at the highest level in two decades, the cost of capital skyrocketed, which is forcing tech companies to be more prudent.
In the fiscal 2024 second quarter, Atlassian generated more than $1 billion in revenue for the first time in its history, 21.5% growth compared to the year-ago period. However, it carefully managed its costs and only increased its operating expenses by 12.1%, which allowed more money to flow to the bottom line.
The company still generated an $84 million net loss for the quarter, but it was an significant 58.8% reduction from its $205 million net loss at the same time a year ago.
Cost management does have one major drawback. Atlassian's 21.5% revenue growth in the second quarter was much slower than its 27% growth rate in the year-ago quarter, and its 37% growth rate in the fiscal 2022 second quarter. The company increased its operating costs by more than 45% in both of those earlier periods, which included even greater increases in marketing spending.
Simply put, pulling back on expenses can limit Atlassian's opportunities to find new customers and generate more revenue.
Why the stock is a buy now
Atlassian stock is trading 54% below its all-time high, which was set during the tech frenzy in 2021. Investors assigned a somewhat unrealistic valuation to the company back then, but the subsequent dip has created an opportunity for those willing to buy in now and hold for the long term.
The company will likely continue to manage costs to reach profitability, but the inclusion of AI will make tools like Jira and Confluence more valuable for businesses, which could drive more revenue growth.
For example, Atlassian Intelligence is available only to paid customers on its Premium and Enterprise plans, not the cheaper Standard plan. So businesses on the Standard plan wanting AI features will have to upgrade, which increases revenue.
I would expect the company to find new ways to monetize AI as it rolls out new features. Microsoft, for example, is charging a higher price for productivity software like 365 (Word, Excel, and PowerPoint) with the inclusion of its AI Copilot feature.
Given Atlassian's large customer base and its long-term experience in developing productivity software, it might be one of the best-positioned companies to capitalize on the AI revolution.
