2023-10-12 17:48:09 ET
Summary
- Atlassian Corporation's share price has risen significantly due to its ten-fold increase in sales over the past decade.
- The company is not able to post earnings despite impressive revenue growth rates.
- Atlassian recently made a bolt-on deal to acquire video messaging platform Loom, but that is not expected to have a significant impact on the Atlassian business.
As Atlassian Corporation ( TEAM ) has made a bolt-on deal for Loom, it is this announcement, in combination with a lagging share price, which calls for an update on a long-overdue investment thesis.
In the final days of 2015, I believed that Atlassian had seen a successful IPO, as it was an interesting business, but I was waiting and hoping for a serious correction before getting involved. In the near decade-long period which has followed, Atlassian has ten-folded sales. This consequently has been priced into the share price, which have risen in a huge fashion as well.
This long-term growth trajectory is very interesting, as Atlassian has now announced an interesting bolt-on deal. However, the issue is that the company is not able to post earnings, as current sales multiples look steep despite still impressive +20% revenue growth rates. After all, sales multiple are at par with those at the time of the offering, as the law of large numbers means that growth has slowed down over time.
A Recap
Founded in 2002, Atlassian seeks to develop software which has the true potential to unleash the potential of teams, with software products like Jira, HipChat and Bitbucket to foster teams collaboration in project management, content creation, messaging, and code sharing. These were important software assets around the time of the offering, with solutions having expanded ever since.
Its software was in great demand, so much that growth was driven by word of mouth rather than due to the efforts of a professional sales force. At the time of the IPO, the company served some 50,000 customers and about 5 million individual users.
The company went public at $22 per share, as some 209 million shares outstanding valued the business at $5.0 billion on an enterprise basis, and shares went up to $27 on their first day of trading. Such a valuation was equal to about 15 times sales, reported at $320 million for the fiscal year before, up 48% on an annual basis. The company did post flattish operating earnings, but this was based on GAAP accounting, as the fact that effective breakeven or smaller profits were reported was pretty comforting.
Being willing to buy the dip, I lost interest in TEAM shares, which naturally subsequently started a mega run higher, certainly in the post-pandemic era.
On Fire
Since the public offering, TEAM shares have been trading stagnant in the $20s in the years which followed, as they had risen to the $100 mark already pre-pandemic. Shares had doubled to the $200 mark by year-end 2020 (in fact trading a bit higher) to peak near $500 in 2021. This was followed by a vicious selloff as well in 2022, with shares down to $120 by year-end 2022, although shares have recovered to the $190 mark by now.
Forwarding to August of this year and we see the amazing transition and growth trajectory which the company has undergone. Revenues have risen to $3.53 billion, up a factor of 10 times from 2015, a dazzling result. That is part of the story, as the company posted a GAAP operating loss of $345 million, which compares to a profit in the year before, as the company doled out nearly a billion dollars in stock-based compensation expense.
As dilution increased the share count to 257 million shares over time, the company is granted a $49 billion valuation at $190 per share, or about $48 billion if we factor in a net cash position just ahead of a billion. This means that the business is still valued at a similar 13-14 times sales multiple as was the case at the time of the IPO, for good reasons given the continued growth, albeit that growth is not yet profitable. That said, momentum is strong on the top line, as fourth quarter sales for the latest fiscal year were up 23% year-over-year.
A Bolt-on Deal
To provide another momentum driver to the business, Atlassian has announced the purchase of video messaging platform, Loom, a business with over 25 million users. The company is valued at $975 million, primarily to be paid in the form of a $880 million cash component, with the remainder in equity awards, although the equity component is relatively small.
The deal tag is equivalent to about 2% of the valuation of Atlassian, and while the deal is expected to be slightly dilutive to operating margins in the coming period, no revenue contribution has been announced.
What Now?
The reality is that I like the Atlassian Corporation business a lot, demonstrated by the fact that revenues have increased a factor of 10 times over the past decade. Relative low-cost of software, stickiness, moat, and easy-to-implement solutions mean that retention rates are high and growth can be maintained. For me, it is clear that growth is strong and that the company generally targets and manages breakeven results, as undoubtedly it could be profitable if it were to slow down growth.
Nonetheless, a 15 times sales multiple in 2015, on the back of breakeven results and 50% growth has only come down to 13-14 times sales here, and this comes after growth slowed down to the 20s. Given all this and other sectors selling off in a broad fashion in recent weeks, I am quite cautious to get involved with Atlassian Corporation stock, as the latest bolt-on deal for Loom (in itself valued at nearly a billion) will not move the needle in any way.
For further details see:
Atlassian: Not Joining The Team