Wait for a Pullback Before You Jump on Atlassian Stock

Amid the Covid-19 pandemic, a series of work-from-home stocks have surged to all time highs against the backdrop of growing demand for remote work software. One such red-hot, work-from-home stock is Atlassian (NASDAQ:TEAM), the Australian enterprise software giant whose digital workflow management tools are considered by many to be mission-critical in a remote work environment. The chart speaks for itself. TEAM stock is up more than 60% year-to-date, and trades at fresh all time highs today.

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Should you chase this big rally in TEAM stock?

I’d be careful.

Atlassian is a winning company. There’s no doubt about it. The company’s digital workflow management solutions will become increasingly mission-critical and ubiquitous over the next decade. Plus, the company’s software-based business model is highly scalable, so robust customer and revenue growth over the next 10+ years, will lead to doubly robust profit growth.

It’s a great growth story, but up at $200 and at 25-times next year’s sales estimates, TEAM stock is already priced for all this big growth.

As such, I wouldn’t chase the rally here. I’d wait for a pullback. And a big one, at that.

Here’s a deeper look.

A Closer Look at TEAM Stock

The core Atlassian growth narrative is very attractive.

The whole idea behind Atlassian is that teamwork is extremely important to organizations, but teamwork is also very hard to do well because organizations and projects often have several moving parts spread across multiple departments.

Altassian provides software tools that aggregate, connect and coordinate all those moving parts, to help organizations work together in the best way possible.

The company’s core offerings include things like Jira (a multi-purpose digital workflow management platform), Confluence (a document collaboration tool) and Trello (a visually-focused project management and collaboration software).

These offerings will become increasingly mission-critical and ubiquitous across the global enterprise landscape as organizations:

1) accelerate their digital transformations

2) more fully embrace permanent remote work solutions, and

3) lean heavier into seamless collaboration and agile project management as competitive advantages.

The growth model is also highly attractive. In essence, Atlassian’s growth pipeline is built on word-of-mouth marketing and a land-and-expand model wherein Atlassian lands at one department in an organization (like HR) and ends up expanding through recommendations to all departments in that same organization (like finance, IT, legal, marketing, etc). The company’s low-price, low-friction offerings also enable a seamless transition from customer interest to customer demand.

Even further, the business model is quite attractive, too. It’s a software-centric business model, with low cost of goods sold, and high gross margins in the 85%+ range, allowing for economies of scale to drive significant profit margin expansion in the long run.

Net net, there’s a lot to like about Atlassian. This is, without a doubt, a long-term winner.

Atlassian Stock is Richly Valued

My only hesitation with TEAM stock is the valuation.

After all, this is a near $50 billion company, that’s slated to do less than $2 billion in sales next year. By the same token, it’s a $200 stock, that’s slated to do $1.35 in earnings per share in 2021.

Those multiples (25-times 2021 sales and 150-times 2021 profits) are rich.

Too rich.

I’m a growth stock investor. And so I understand that just looking at today’s multiples and calling a stock richly valued doesn’t make much sense. You have to model the company out 5 to 10 years, and see where revenues and earnings will wind up in the long run.

Once you do that with Atlassian, though, it becomes clear that TEAM stock is overvalued.

Atlassian is consistently adding roughly 5,000 to 7,000 new customers per quarter. Considering the customer base is at just 170,000 (versus an addressable market of one million businesses), I believe this customer growth cadence will persist. So will ~10% average revenue per customer growth, thanks to the company’s compelling land-and-expand model.

Assuming gross margins expand towards 90% with higher unit revenues and operating margins expand to 30%+ on the back of positive operating leverage, my modeling says that — in a best case scenario — Atlassian hits $10 in earnings per share by 2030.

As a refresher, earnings per share in 2021 are expected to be just $1.35. So we are talking 650%+ profit growth over the next ~9 years, or 20%+ growth per year.

Application software stocks normally trade at 35-times forward earnings. Based on a 35-times forward multiple and a 10% annual discount rate, $10 in 2030 earnings per share implies a 2020 price target for TEAM stock of… $150.

Bottom Line on TEAM Stock

Atlassian is a long-term winner. TEAM stock is overvalued.

Both are true today.

Accordingly, I wouldn’t chase this work-from-home rally in TEAM stock. Instead, I’d let the hype die down. I’d let the market take a breather on work-from-home stocks. I’d let the TEAM stock price fall back into more tangible territory.

Then I’d buy the dip.

Until then, patience is your best friend. Don’t let FOMO (fear-of-missing-out) push you into the right stock at the wrong price.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/07/wait-for-a-pullback-team-stock/.

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