Atlassian [NASDAQ:TEAM] is already Australia’s largest technology company, but we think the company’s shares have further to go. This is just our opinion, although we are being echoed in some other quarters, of which more below. Atlassian is a cloud technology play and it sits in that sweet spot, facilitating the ongoing digitisation of the planet, a trend which the ongoing pandemic is only speeding up.
Atlassian went public in December 2015 on NASDAQ with a market cap of more than $4bn. It was called “a very boring software” company by the New York Times, but the IPO made its founders Mike Cannon-Brookes and Scott Farquhar billionaires overnight. By March 2019 the company was valued at north of $26bn.
Its focus has been to take the business away from server-based products to a more cloud and data centre-based approach to supporting its enterprise clients. In this respect it sounds like a mini-Amazon Web Services. Let’s not forget just how important revenues from AWS are to Amazon. Atlassian is sailing in similar waters.
Atlassian is now best known for its flagship Jira Service Management software, which makes it look like a very different company than when it listed in 2015. It reported Q2 revenues of $501m, up 23% from a year ago and beating Wall Street consensus forecasts of $471m. Atlassian stock has done well since September, up from around the 167 mark in mid-September, to trade at 243 at close of the US market on Friday.
The stock is already well above its pre-pandemic levels and demonstrates the dramatic shifts towards using cloud technology by companies in the US and further afield.
We think Atlassian still has some significant momentum behind it and the US analysts are slightly behind the curve in estimating the speed of take up of cloud services by the corporate sector. This was already gathering speed in 2018-19. but the pandemic has already defined the advantages of cloud technology to CTOs in the last 12 months. We think this is being underestimated and the recent Atlassian numbers underpin this.
David Hynes, an analyst at Canaccord Genuity, has maintained his buy rating on Atlassian and set a new target price of $260 in his last note, which is almost 15% higher than his previous forecast. The consensus among 12 brokers tracking Atlassian is for a moderate buy with a target at $253. Some brokers are more bullish and there is one with a $350 price on the stock (Ittai Kidron at Oppenheimer).
There is a major shift going on at Atlassian: new server license sales are ending this month and support for all server products will end February 2024. The company said that it anticipated overall server revenue growth would decline from Q2. Subscription revenue will be the primary driver of growth, with Atlassian telling shareholders that it expects to achieve subscription revenue growth in the mid-30% range. “We continue to expect this revenue driver to build steadily over time” the company said.
We would agree with this. Atlassian represents a solid mid-tier play in the ongoing growth of cloud services and it reports many of its corporate customers are now moving off a server-based data model to a cloud-based one.