Shares of the collaboration-focused software company Atlassian (TEAM -0.89%) were moving higher on an analyst rating upgrade this morning and broader tailwinds in the tech sector, as a weaker-than-expected producer price index reading cooled inflationary fears after the hot CPI report on Wednesday.
As a result, the stock finished Thursday's session up 4.8%.
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This cloud has a silver lining
Barclays raised its rating on Atlassian from equal weight to overweight, citing its growth in its cloud segment. The analyst raised its price target from $235 to $275 and noted that Atlassian is seeing "healthier" growth as more enterprise customers have moved to its cloud platform as it's cut off support for its on-promise server product.
Barclays also said Atlassian's cloud momentum should earn the stock a higher multiple, and it's demonstrated improved revenue durability.
Atlassian stock is still down roughly 50% from its pandemic-era peak as, like a lot of software stocks, it soared during the pandemic's earlier stages.
Is Atlassian a buy?
Its valuation still looks pricey at a price-to-sales ratio of around 15, but the company did note the progress it's making in the cloud on its last earnings report. It said that the number of enterprise seats that have migrated to the cloud increased by seven times since it announced the end of support for the on-premise server segment.
Atlassian is still unprofitable on a generally accepted accounting principles (GAAP) basis, though the company is making progress on that front and could turn profitable within the next year.
While the company is making progress in the cloud, given its valuation and lack of GAAP profits, investors should temper their expectations for future growth from the stock unless top-line growth accelerates or it reaches profitability faster than expected.
