2026 has not been kind to software stocks. Fears that more companies will use generative AI products for a broader set of software needs have led many analysts to rerate earnings multiples for companies that rely on the typically predictable software-as-a-service (SaaS) model.
One of the hardest-hit companies in the sector is Atlassian (TEAM +0.25%), which saw its stock drop almost 90% from its all-time high. Shares have started to recover, but one analyst still sees significant upside. In fact, Piper Sandler's team thinks the stock can double from here, recently setting a share price target of $175.
That's not an unreasonable expectation either, as Atlassian benefits from high retention rates and multiple tailwinds that can drive earnings growth through the end of the decade, despite the challenge posed by artificial intelligence (AI).
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AI is weighing on the stock but not the business
Atlassian is leaning into the potential for AI to enhance its software and keep customers subscribed. While it sunsets its self-hosted data center software, its cloud-based solution is seeing accelerated revenue growth. Data center revenue climbed significantly in the first quarter due to revenue recognition timing.
The company has developed its own AI platform, Rovo, which helps users find information and accomplish small tasks within its software. It's packaged its AI solutions with its software to drive sales, seeing strong adoption. Its Service Collection package, which includes prepaid monthly AI credits, surpassed $1 billion in annualized recurring revenue last quarter, up 30% year over year. What's more, its AI credit usage climbed 20% month over month throughout the quarter.
One of the most important details from the recent earnings report is that customers using Rovo are growing their annualized recurring revenue roughly twice as fast as those who aren't. That lends credence to Piper Sandler's assertion made before the earnings release that AI isn't disintermediating Atlassian's software. If anything, it makes it more useful. Indeed, management argues AI needs context, which comes from the data and systems organized by Atlassian's software, what it calls the "system of work."
NASDAQ: TEAM
Key Data Points
Management estimates its addressable market is $140 billion, and it has opportunities to capture a larger portion of that market by expanding its offerings, cross-selling customers, upselling to more expensive services (like Rovo), and bringing in more customers. It expects migrating customers to the cloud will drive further growth, as customers often expand their user licenses quickly and increase annualized recurring revenue by 75% after three years, management said.
As it scales, Atlassian should produce strong operating leverage, especially after sunsetting the data center-based business, which is a drag on development costs and sales expenses. At just 15.5 times earnings, it's not unreasonable for Atlassian to trade at twice its current price. Indeed, Piper Sandler's analysts said the reason its price target moved lower ahead of earnings was merely to align its price multiple with the rest of the beaten-down industry. It doesn't necessarily reflect the true value of the business, which could be even higher.
