Back in early July – with Atlassian (NASDAQ:TEAM) stock trading up around $190 – I said that investors would want to wait for a pullback before buying into this hyper-growth company that’s behind two of the industry’s most widely used digital workflow management platforms, Trello and Jira. That pullback has finally arrived. TEAM stock has shed as much as 15% in September.
And guess what?
It’s time to buy TEAM stock.
Here’s a deeper look.
Atlassian is a Long-Term Winner
The core Atlassian growth narrative is very attractive.
Atlassian builds tools which help companies work better together in digital environments. These tools – including Jira (a multi-purpose digital workflow management platform), Confluence (a document collaboration tool) and Trello (a visually-focused project management and collaboration software) – are becoming more and more mission-critical as enterprises increasingly accelerate their digital transformations, lean into hybrid work environments and more fully adopt seamless collaboration and agile project management to develop competitive advantages.
After all, if a company can’t collaborate efficiently on a project, then that project will take forever to get done. And, that business will be a step behind competitors who did collaborate efficiently on projects.
To that extent, competitive dynamics and digital transformations imply that digital workflow management platforms will reach enterprise ubiquity over the next several years.
Atlassian is at the heart of this market, with low-price, low-friction, widely-adopted platforms that have high brand awareness.
So long as Atlassian can lean into those advantages to sustain workflow management market leadership, the company will sustain significant customer, revenue and profit growth over the next five to 10n years.
Tons of Upside Potential
Atlassian has just 170,000 customers today. It’s addressable market stands at north of 1 million businesses. Plus, thanks to its land-and-expand model wherein Atlassian lands in one department at an organization and then expands into other departments, the company has been sustaining steady double-digit growth in average revenue per customer for several quarters.
So it’s fair to say that Atlassian is far from maxed out in terms of customer and revenue growth.
Indeed, it’s fair to think that Atlassian – which is consistently adding roughly 5,000 to 7,000 new customers per quarter – will sustain this customer growth cadence for the next several years. It’s also fair to think that Atlassian will sustain ~10% average revenue per customer growth, too, thanks to land-and-expand dynamics. This combination broadly implies ~20% compounded annual revenue growth over the next several years.
Meanwhile, Atlassian is a high gross margin business (gross margins are running toward 90%) with a highly scalable software-focused operating model. Thus, operating margins should expand meaningfully over the next few years. Profit growth, then, should remain in excess of 20% per year.
Under those assumptions, my modeling says that Atlassian will hit $10 in earnings per share by 2030.
Application software stocks normally trade at 35-times forward earnings. Based on a 35-times forward multiple and an 8.5% annual discount rate, $10 in 2030 earnings per share implies a 2020 price target for TEAM stock of roughly $170.
Thus, below that level, TEAM stock looks like a buy.
Technicals Imply a Near-Term Bottom
Over the past four years, the 200-day moving average in TEAM stock has provided a solid resistance for shares during pullbacks.
For example, the 200-day moving average largely held through sell-offs in late 2017, late 2018, late 2019 and early 2020 (Covid-19).
Today, the 200-day moving average sits around $160. That’s only marginally below where shares trade today.
Consequently, from a technicals perspective, Atlassian stock appears to be at or at least close to a near-term bottom. History says the stock should get back to its longer-term winning ways within the next few weeks.
Bottom Line on TEAM Stock
It’s time to start thinking about buying the dip in TEAM stock. The fundamentals remain solid. The valuation is now fair. And the technicals imply that the sell-off is close to over.
What more could you ask for?
Not much. So buy the dip.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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