Atlassian: Good Time To De-Risk Again After Sharp Rebound Rally (Rating Downgrade)

seekingalpha11-05

Atlassian's fiscal Q1 earnings exceeded expectations, but the stock's recent 60% rebound from July lows suggests it's time to take profits.Despite a slight revenue outlook boost and a $1.5 billion ...

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In other words, this outlook is still conservative and has room for further upside. But again, the stock price has already compensated for this upward revision. Second: Atlassian is touting a new $1.5 billion share buyback. While Atlassian certainly has a good chunk of cas","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["rate"],"viewcount":null,"language":"en","relate_stocks":{"TEAM":"Atlassian Corporation PLC"},"translate_title":"Atlassian：大幅反弹反弹后再次去风险的好时机（评级下调）","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TEAM":0.9},"content_text":"Atlassian's fiscal Q1 earnings exceeded expectations, but the stock's recent 60% rebound from July lows suggests it's time to take profits.Despite a slight revenue outlook boost and a $1.5 billion share buyback, Atlassian's valuation appears rich, with limited immediate upside potential.Key risks include slowing profit expansion, macroeconomic uncertainties, and the end-of-life of its server business, which may impact future growth.Atlassian remains a high-quality company, but current prices suggest better buying opportunities may arise; recommend moving to the sidelines for now.   Sundry Photography  Earnings season is powering through, and so far despite upcoming election jitters, many growth stocks have continued to shoot through the roof on strong results. Atlassian (NASDAQ:TEAM), the collaboration software stock, is one of these names. Bouncing back after an initially conservative FY25 outlook, Atlassian wowed investors in its fiscal Q1 (September quarter) earnings print with a revised outlook as well as a flashy new $1.5 billion share buyback program. Year to date, shares of Atlassian have underperformed the S&P 500, only about flat after the recent post-earnings pop. The question for investors now is: after rebounding roughly 60% from YTD lows around ~$140 in July, does this rebound rally still have juice left? Data by YCharts After a sharp rebound rally, it's a great time to take profits off the table I last wrote a bullish note on Atlassian in August, when the stock was trading just shy of $150. I had cited a low post-selloff valuation as one of the core reasons to buy the stock then, but I had intended it largely as a short/midterm trading position that needed to be watched carefully. It has been a successful run so far, and I'm inclined to take profits off the table, and I am downgrading my rating on Atlassian back down to neutral.  There are two things that give me pause here. The first is the fact that while it's true Atlassian boosted its outlook for the full year, it wasn't by much. The company is now expecting 16.5-17.0% revenue growth for the full year, versus an initial outlook of \"approximately 16%\" (which triggered a sharp selloff because Wall Street had hoped to see 18% growth).   Atlassian guidance update (Atlassian Q1 shareholder letter) We have to ask ourselves: do investors really feel that Atlassian is suddenly now worth 60% more (relative to how we were feeling back in July), after a 50-100bps boost in growth expectations? Of course, Atlassian is still likely to take up its outlook again: the company notes that it has baked both macroeconomic uncertainties plus execution risk into this outlook, due to bringing on a new Chief Revenue Officer this year. In other words, this outlook is still conservative and has room for further upside. But again, the stock price has already compensated for this upward revision. Second: Atlassian is touting a new $1.5 billion share buyback. While Atlassian certainly has a good chunk of cash to play with, this buyback appears to me quite poorly timed, especially after the sharp rebound rally in which a bigger chunk of buybacks should have happened. At current share prices, I see more of a balanced bull-and-bear case here. On the positive side for Atlassian:   Mission-critical collaboration software. Atlassian's Jira software is among the best-known project management and collaboration software tools in the market for dev teams. Especially as more and more workforces employ a distributed and hybrid model, software systems like Atlassian become the \"point of record\" that keep projects moving along and teams on the same pace.  Unique word-of-mouth sales model. Atlassian has continued to deploy a policy of prioritizing inbound marketing rather than hiring a full field staff to sell its products, which is the standard playbook in enterprise software. This has allowed the company to focus more of its spending on products and R&D.  At the same time, however, I'd be wary of the following risks:   Profit expansion is slowing. Despite its sales-light business model that has allowed the company to hit high operating margins, its pace of margin expansion has dramatically slowed (or even reversed at times), which may call into question the company's opportunistic earnings multiples.  Macro and sales risks. On top of a potential macroeconomic crunch that may delay IT implementation projects, the company is also lapping the end-of-life of its server business, which may continue to induce churn that the company isn't yet seeing.  All in all, Atlassian still remains a high-quality company, but I no longer see the obvious and immediate upside potential in this stock as I did back in August. I'd recommend moving to the sidelines here and re-adopting a watch and wait stance on Atlassian. Q1 download Let's now go through Atlassian's latest quarterly results in greater detail. The Q1 earnings summary is shown below:   Atlassian Q1 results (Atlassian Q1 shareholder letter) Atlassian's revenue grew 21% y/y to $1.19 billion, ahead of Wall Street's expectations of $1.16 billion (+18% y/y) by an impressive three-point margin. Even more impressively, as shown in the chart below, is the fact that instead of seeing decelerating revenue as the company had guided to and as many investors had expected, Atlassian's revenue growth actually accelerated slightly relative to 20% y/y growth in Q4.   Atlassian revenue trends (Atlassian Q1 shareholder letter) Still, management notes that we should be careful to extrapolate this 20%+ growth into the rest of FY25. The company has a difficult comp in FY24, when it sunsetted its server products, triggering a wave of customer buying activity and shifts in deployment. The company will also no longer have server maintenance revenue to boost its top line this year, and subscription-based sales don't have the upfront revenue recognition that license deals do. In other words, we still do expect deceleration in growth to the ~teens this year. To me, however, the more disappointing piece in Atlassian's Q1 earnings print was its slight reduction in operating margins. Pro forma operating margins, as shown in the chart below, decayed 40bps y/y to 22.6%:   Atlassian margin trends (Atlassian Q1 shareholder letter) The company has kept up expense growth in line with revenue growth, and no longer has the benefit of one-time server sales this year. And to me, the company's longer-term operating margin goal of 25%+ by FY27 (only 240bps of further margin expansion in two years) is also disappointing. As Atlassian's growth slows to the teens and its operating margins don't move upward by much, the stock will soon lose its \"Rule of 40\" status: though only an optical pro forma metric (calculated as revenue growth plus pro forma operating margins, meant to test the balance between growth and profitability for software companies), losing this status may be further justification for a compression in Atlassian's valuation multiples. Valuation and key takeaways Speaking of valuation: the stock's recent rally has left multiples looking quite rich again. At current share prices near $219, Atlassian trades at a $57.15 billion market cap. Netting off the $2.44 billion of cash and strategic investments on the company's latest balance sheet against $986.4 million of debt gives us an enterprise value of $55.70 billion. For the current fiscal year FY25, we note that Wall Street is already on the high end of the company's guidance range, expecting revenue of $5.09 billion or 16.8% y/y growth. And in FY26, the Street is calling for a further acceleration in growth, up 19.9% y/y to $6.10 billion. Even if we take these relatively aggressive estimates at face value, Atlassian is back to trading at richer valuation multiples of:  10.9x EV/FY25 revenue 9.1x EV/FY26 revenue  Many other large-cap software companies like Salesforce (CRM) and Workday (WDAY), whose growth is in the ~teens, have fallen to the 6-7x forward multiple. While Atlassian's growth certainly affords some bit of a premium, I'm more content at current prices to take chips off the table.  The bottom line here: in my view, investors will have another chance to buy back into Atlassian at a better price. Don't get too greedy here, and take profits while you can.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2481574375"}