Earnings season is kicking off, and we have already seen strong quarters from some of the biggest companies like Microsoft (MSFT -1.32%) and Apple (AAPL -2.41%). Investors who own tech stocks have a pivotal earnings season this quarter, however. Many growth stocks have been crushed over the past three months, and this earnings season could turn things around for them.
One of the first cloud stocks that reported earnings this season was Atlassian (TEAM -0.86%), and it did not shy away from greatness. The company posted strong results on just about every aspect of its business, which sent shares up nearly 10% on Friday, January 28. This brought the company to a market capitalization of $80 billion, so is this team management tool still worth buying if you want to see multi-bagger returns over the next decade? Let’s find out.
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A blowout quarter
Atlassian has a suite of workflow management tools that make teams more efficient. Its tools like Jira Work Management, Trello, and Confluence all allow teams to collaborate, build, and create products easily together. Just as you would expect, the demand for collaboration tools hasn’t disappeared, and Atlassian benefitted immensely from that. The company grew its Q2 2022 – which ended December 31, 2021 – revenue by 37% year over year to $688 million and decreased its net loss to $77 million from $622 million in the year-ago quarter. Both of these results handily beat Wall Street expectations as well.
Atlassian’s revenue growth accelerated this quarter to 37%, where it had previously been in the high 20% or low 30% range, and this was driven by exceptional cloud adoption. Cloud revenue grew 58% year over year, which marked a strong acceleration in growth from Q1 2022 where Atlassian posted 53% year over year. This quarter was the fastest cloud growth for any quarter in the past six quarters, and cloud revenue now makes up 53% of revenue compared to 46% in the year-ago quarter.
The company was not profitable this quarter – its net loss margin was roughly 10% – but the company did report strong cash generation. Atlassian had over $197 million in free cash flow, which grew 10% year over year. Now, the company has a free cash flow margin of almost 29%, meaning every $1 it makes in revenue, it generates $0.29 in cash profit. This impressive performance, combined with $900 million in cash and equivalents on its balance sheet means that investors should not be incredibly worried about Atlassina’s unprofitability.
The company has been investing heavily in research and development to establish itself as the prominent leader in this competitive industry, which is why the company is remaining unprofitable. However, these investments are paying off: Atlassian become a leader in the Enterprise Service Management space according to Forrester’s Wave. Now, Atlassian is one of just two top dogs in the market, up against ServiceNow (NOW -2.34%)
The scratches on the armor
It wasn’t all sunshine and rainbows in this quarter. The Chief Technology Officer, Sri Viswanath, announced his departure at the end of the 2022 fiscal year. This exit is so that Sri can pursue other opportunities, and with a studded resume for his work at Atlassian, he has the potential to become a big name in the tech space. Since joining in 2016, Viswanath was one of the core builders of Atlassian's cloud-based solutions – which makes up the core of its business now.
Shares of Atlassian are still very expensive. Shares have dipped roughly 30% in line with the tech sell-off, but not as much as many other tech stocks. Atlassian has always had a high valuation, and with a weak sell-off in its shares, the company is valued higher than most other tech companies. Shares currently trade at roughly 36 times sales – much higher than other stocks like ServiceNow, which trades at 19 times sales.
Is it a buy?
Despite the company’s high valuation and high market cap, Atlassian is worth buying right now because it is executing on all fronts. The company’s growth strategy is and will continue to be in the cloud for the foreseeable future, and this quarter is a great example of what investors should look for in Atlassian’s coming quarters. With accelerating growth in both total revenue and cloud revenue, it shows that customers are rapidly adopting Atlassian's cloud products and expanding their relationships with the company.
The company is also flexing its brand name and pricing power by increasing its prices, which shows how dominant Atlassian is in this space as a leader. The company eyes an addressable market of $24 billion, and with just $2.4 billion in trailing twelve-month revenue, this company has plenty of room to expand. With its industry leadership and strong execution, I think Atlassian will be able to capitalize on it.
