The Nasdaq Composite soared 43% last year as recession fears diminished and investors piled into artificial intelligence (AI) stocks. That momentum has spilled into 2024, with the index advancing another 5% year to date. However, Morgan Stanley analysts led by Keith Weiss still see substantial upside in certain Nasdaq stocks.
For instance, the analyst team has given Atlassian (TEAM -9.56%) a bull-case price target of $441 per share, implying a 113% upside over the next year. Investors should never anchor their stock buying habits to price targets, especially when they are coming from a single institution, but Atlassian still warrants consideration.
Atlassian is a leader in work management and service management software
Atlassian provides software that helps businesses plan, track, and complete all sorts of projects. Its platform addresses three interconnected markets: work management for technical teams like development and operations, work management for non-technical teams like marketing and human resources, and IT service management. Atlassian believes its products address a $29 billion market that is growing by 14% annually.
Atlassian is unique in its ability to connect technical and non-technical teams with work management products. It is also unique in its ability to pair work management and IT service management products. That strategy is attractive because it supports vendor consolidation, meaning customers can replace disparate point products from multiple vendors with a single, integrated platform from Atlassian. Doing so eliminates the cost and complexity of learning and maintaining different systems.
Atlassian has garnered praise from industry analysts in several product categories. Forrester Research recently recognized its leadership in enterprise service management, awarding the company a perfect score in product development strategy. Additionally, consultancy Gartner named Atlassian a leader in enterprise agile planning tools, and research company G2 recognized Atlassian as a leader in product management and knowledge management software.
Accolades from industry analysts tell investors Atlassian is doing something right. They also tell prospective customers that its products are worth consideration. One reason for that success is its atypical cost structure. Specifically, the company relies on self-service sales and word-of-mouth marketing to reduce costs. Doing so allows Atlassian to spend more on product development than its peers. The benefits of that strategy are evident given the company has a strong market presence in several industry verticals.
Atlassian reported encouraging fiscal 2024 Q2 financial results
Atlassian, like many software vendors, lost momentum last year as businesses pulled back on IT spending to compensate for the difficult economic climate. But that headwind is diminishing. In the fiscal 2024 second quarter, management said free-to-paid customer conversions stabilized, clients added paid seats more quickly, and many opted for annual (rather than monthly) subscriptions. In turn, revenue rose 21% to $1 billion and non-GAAP net income increased 65% to $190 million.
Going forward, artificial intelligence could be a catalyst for Atlassian for two reasons. First, the company recently launched Atlassian Intelligence, a suite of generative AI tools that can automate routine tasks and summarize content. Second, businesses that want to build AI applications could benefit from work management products that streamline software development and deployment. Atlassian's Jira Software is one of the most popular tools on the market for such use cases.
Atlassian stock trades at a reasonable valuation
Morgan Stanley's bull-case price target of $441 per share is based on a discounted cash flow model that assumes annual revenue growth of 29% through 2029. That is more optimistic than the Wall Street consensus estimate, which calls for annual revenue growth of 22% over the next five years. In either case, the current valuation of 13.8 times sales looks reasonable, and that multiple looks particularly attractive compared to the three-year average of 23 times sales.
I doubt Atlassian will deliver triple-digit returns in the next year (or anytime soon, for that matter). But investors with a five-year time horizon should consider buying a small position in this stock today. Atlassian outperformed the market over the past five years, albeit narrowly, and the company has a good shot at market-beating returns over the next half-decade.
