GOOGL - Atlassian AI And Business Effectiveness

2023-06-14 08:21:12 ET

Summary

• Atlassian core view about AI is that teamwork (their core) is always the backbone of human achievement and AI used effectively helps teams.
• Three forces shape how teams work together: software eats the world and it is supercharged by AI; teams need autonomy to work effectively; distributed work is here to stay.
• Atlassian’s products focus on team effectiveness and they make a virtue of flexibility.
• While the big AI players live in a high-stakes world that is subject to hysteria about fads, companies like Atlassian are grounded and aligned with AI as a means to enhance enterprise success. Atlassian is worth watching.

There is so much hype around AI (Artificial Intelligence) currently that it got me thinking about how investors choose to focus their (limited) time in thinking about how to structure their investment portfolios. On the one hand there is the reality that this year there are only a small number of companies responsible for positive performance of the market and AI is a common theme. The vast number of public companies have tread water or worse. There are a number of versions of the AI universe and just about every list has companies that might have an AI element, but they surely have AI as part of a bigger picture. Others are more narrowly focused on technology that is relevant to AI today (e.g. NVIDIA ( NVDA ) although whether this will be the case tomorrow is less clear as the focus of AI is changing rapidly. At a personal level for some AI ends up as a story about writing job applications, computer gaming, messing with images etc., but the meat can be hard to get to. When I'm investing in the future I try to get a sense of where things are headed and which companies might become major players. This has been at the center of my successful investments in renewable energy (e.g. Enphase ( ENPH )) and electrification of transport (e.g. BYD ( OTCPK:BYDDF )). I can't help but think that AI is going to be more about revolutionary changes in speed and efficiency of making sense of complexity. In biotech this is about pulling out new information from very complex datasets which will for example change disease diagnosis (in this case which biotech companies are going to lead this change?). More generally I suspect AI will dramatically speed up and expand the scope of computer programming and data management in general. With that in view I've become interested in companies that deal in data and Atlassian ( TEAM ) seems a good example. Here I explore how the Atlassian team is approaching developments in AI and how it is impacting their business.

Singularity

First a bit of context about AI and scary possibilities. Ramy Taraboulsi recently wrote about the upcoming arrival of "The Singularity" and how it might impact investors. I think it is worth digging a little into Singularity because it encapsulates how some see the future. The thing is that we live in an age of hyper-fearmongering perfected by certain "politicians" and this stuff permeates everywhere. There is a lot of literature on The Singularity and it fits my bias about fearmongering by blending lots of different innovations to make them one big scary issue. Ramy brings Singularity, what he calls " the merger of humanity with machines and artificial intelligence " into Ray Kuzwell's "three interconnected technology revolutions": Genetics, Nanotechnology and Artificial Intelligence ((AI)). I know a bit about genetics and nanotechnology and not so much about AI. It is clear to me that while bringing these three technology revolutions together has merit (there are often synergies in revolutions), it doesn't help to make them a cohesive monster even from the perspective of understanding, and much less as an investor. I know enough about Genetics and Nanotechnology to have had successful investments in these areas without having to retreat to a bunker in fear. Both areas are remarkable and are spawning amazing developments that will change human existence. A visit to a pioneering museum recently near my rural Australian property was a reminder of how profoundly our knowledge and ability to understand and treat disease has changed. Medicine's ability to dissect an individual's genes, understand risks and even prescribe treatments relevant to one's genetic condition is remarkable and contrasts dramatically with a small briefcase of bottles of remedies and a few blunt surgical instruments on display in the pioneer museum. Of course we need a legal framework to prevent exploitation of the vulnerable and provide some guiderails for what is and isn't reasonable. Frankly I'm happy to trade off privacy to enable, if necessary, a doctor in a foreign country being able to access all details of what is known about keeping me functioning.

In summary I think bringing genetics and nanotechnology into a big scary word "Singularity" isn't helpful. Let's consider each of the areas of genetics, nanotechnology and AI separately as investors and dig a little to see how they impact our investment decisions. Here my focus is on AI.

The impact of AI

A quick look at the US investment landscape quickly makes one realise that we are in an AI bubble currently, with a small number of companies being responsible for just about all of the good times in the US investment scene this year.

The list of companies singled out as AI players is quite small, but pretty diverse. Some examples include : C3.ai ( AI ), Microsoft ( MSFT ), Alphabet ( GOOG ), NVIDIA ( NVDA ), Upstart ( UPST ). Another view cites Apple ( AAPL ), Microsoft, Amazon ( AMZN ), NVIDIA, Meta Platforms ( META ) in the top five AI companies. Tesla ( TSLA ) is even in the mix .

These companies focus on some aspects of the "grunt" computing power needed for AI developments. They are about enablement, sort of the picks and shovels of the AI revolution. I think all of the above companies have a lot of complexity and it isn't easy to single them out as companies relevant for an AI-specific investment. For example one view of Google is that it is very dependent of advertising revenue and there may be other AI-relevant investments (e.g. Microsoft for its ChatGPT) that could endanger Google's advertising revenue.

If you are big on research you can go to Clutch's 4,675 companies in the Artificial Intelligence space. This takes you down a wormhole of huge complexity and possibility. There are undoubtedly opportunities in the Clutch list that will become 10-baggers, but it is a complex and confusing exploration.

What about the rest of the public company sphere?

Here I take a look at an information-based company Atlassian that at first sight might be expected to be significantly impacted (negatively) by the march of AI. Atlassian's Q3 2023 Earnings transcript gives a different take on AI.

Atlassian

Atlassian is a substantial player in workspace software. The business has been reviewed by Gary Alexander recently. He shows a solid business with a massive install base that is sticky because Atlassian software provides "glue" for critical operations within its customer businesses. The company has a substantial margin on its products. Gary Alexander had some reservations, the biggest being Atlassian's healthy valuation.

Atlassian view about AI

The Q3 2023 newsletter to shareholders announced 500 retrenchments due to the macroeconomic outlook. There is a big commitment to AI but the retrenchments were not closely linked to the rise of AI. It is all about teams and humans making the difference, with AI an enhancer. If you want to get a flavour of the Atlassian products and how they help teams to work better, read the Q3 2023 newsletter.

The Atlassian Q3 2023 Earnings transcript , after a brief introduction, is mostly a Q&A session that is worth reading. Atlassian Intelligence is introduced as a virtual teammate, "which uses generative AI technology and leverages the Atlassian platform to accelerate customers' work in a way that is tailored to them". There is a lot of focus on migrating to the cloud.

Atlassian's view about software developers and the threat of AI is as follows:

when you make software developers more efficient, if you're talking about artificial intelligence or large language models with code assistance and writing code, et cetera, or creating parts of software that makes far more software. The more software there is in the world, that's good for Atlassian in a generalized sense....The more software you have -- the more need you have for designers and program managers and making sure that we have the right software that we're building, you now have a lot of software to operate and run and manage. So the more software there is in the world, that's generally I think a good thing for Atlassian….We maintain incredible optimism for artificial intelligence and what it can do for us as a business to help unleash a potential of our customers, to help them create and manage more software.."

The Atlassian Q3 2023 transcript has lots more on AI, but all through the lens as to how it impacts the business. Atlassian sees itself operating far more broadly throughout a customer's business than just with the IT team. Indeed a key part of Atlassian's business is to help technology and business teams work better together.

Conclusion

In this article I've tried to make sense of the hysteria that surrounds a lot of the discussion of AI and extending this into considerations of "Singularity" which I find somewhat bizarre. A huge issue for AI is its ability to blur the boundary between reality and a made-up world. A trivial but interesting case is Paul McCartney's putting together the upcoming "Last Beatle's Record" by extracting John Lennon's voice from some playing around in the 1980's and mixing it to make a "virtual" performance. How creative! Possibly the dark side will be seen in 2024 as a Presidential election looms, with the prospect of all kinds of convincing nonsense being promoted as real…

The market has latched on to AI as the next big thing and a small group of big companies with some part of their business related to AI developments have become the focus of share price rises that may or may not make sense. A lot of this is a fad. Microsoft owning ChatGPT is an example of a technology that might end up being fabulously valuable, but having Tesla in the AI mix misses the point of a Tesla that spreads its wings well beyond AI.

The point about this article is more mundane. AI is already a big focus for some companies as a tool to drive their businesses, here presented through the views of Atlassian management. I like the (tongue-in-cheek?) Atlassian view in their Q3 2023 transcript " Atlassian Intelligence is like a floodlight lighting up new customer insights". Atlassian "gets" AI and it is working hard to embed it into their business at all levels, but a key point is that Atlassian is about using AI to solve human problems, not technology problems. And the focus is not just on Fortune 500, but as Atlassian Founder and Co-CEO Mike Cannon Brookes says " in the long term winning the fortune 500,000" . While the shares are not cheap and a better entry point might be not far off as the company foreshadows a worsening of the business environment next quarter, it is worth thinking about what it is that makes Atlassian an interesting investment opportunity.

I am not a financial advisor but I spend time thinking about investment opportunities and how to approach this from a qualitative perspective to complement traditional financial analysis. I hope that my comments about AI in general and Atlassian specifically are of some interest to you and your financial advisor as you consider how you might approach investment relevant to AI.

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