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Atlassian Plunges 30% YTD: How Should Investors Play the Stock?
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Shares of Atlassian (TEAM - Free Report) , a prominent player in enterprise collaboration and workflow software space, have plunged 30.3% year to date (YTD). Meanwhile, the Zacks Internet - Software industry in which the stock belongs has gained 14.9% in the year-to-date period.
TEAM stock has also underperformed the Zacks Computer and Technology Sector and S&P 500 index in the YTD period. The Zacks Computer and Technology sector and S&P 500 index have returned 20.7% and 18.4%, respectively, YTD.
Given Atlassian's reputation as a leader in the enterprise collaboration and workflow software space, this underperformance is disappointing. This raises a crucial question for investors — Is it time to sell Atlassian stock?
Atlassian’s Sluggish Growth: A Major Red Flag
One of the most alarming trends for Atlassian is its sluggish sales growth. The company’s sales growth has been continuously decelerating in the post-pandemic era. In the last two fiscals, it had posted revenue growth in the low-to-mid 20s percentage range compared with mid-30s percentage range growth in fiscal 2022.
Atlassian’s forecast for first-quarter fiscal 2025 and the consensus estimate for the upcoming two fiscals indicate a further deceleration in revenue growth. For the fiscal first quarter, it anticipates revenues between $1.149 billion and $1.157 billion, reflecting year-over-year growth of 17.5-18.3%. The Zacks Consensus Estimate for fiscal 2025 and 2026 revenues reflect a year-over-year increase of 15.9% and 18.9%, respectively.
Another near-term headwind for the stock is rising research and development (R&D) costs driven by increased investment in artificial intelligence to enhance its product capabilities. In the last reported financial results for fourth-quarter fiscal 2024, its non-GAAP R&D expenses soared 27.5% year over year compared with revenue growth of 20.5%. Increased R&D expenses negatively impacted profitability, with non-GAAP operating margin contracting 200 basis points.
Atlassian YTD Performance
Image Source: Zacks Investment Research
Atlassian’s decelerating customer growth rate makes us increasingly cautious about its near-term prospects. The company’s customers have witnessed a CAGR of 14.7% between fiscal 2020 and 2024, much lower than the 30% CAGR it registered between fiscal 2016 and 2020.
Macro Uncertainties & Competition to Hurt TEAM’s Prospects
Atlassian’s near-term prospects might be hurt by softening IT spending. Enterprises are postponing their large IT spending plans due to a weakening global economy amid ongoing macroeconomic and geopolitical issues. This does not bode well for Atlassian’s prospects in the near term.
Although Atlassian has long been a strong contender in the collaboration and workflow software space, the market has continuously been crowded by industry leaders like Broadcom (AVGO - Free Report) , Microsoft (MSFT - Free Report) , Alphabet (GOOGL - Free Report) , Salesforce and IBM.
Atlassian’s JIRA software matches solutions like Broadcom’s Rally Software, Microsoft’s Azure DevOps Server and IBM’s Rational. TEAM’s Confluence product competes with Salesforce Chatter and Alphabet’s Google Apps for Work.
Intensifying competition could force Atlassian to resort to competitive pricing to safeguard its market share. This will ultimately impact its profitability.
What Investors Should Do With TEAM Stock
Atlassian’s near-term prospects might be hurt by softening IT spending amid ongoing macroeconomic uncertainties. The decelerating sales and customer growth rate also makes us increasingly cautious about its near-term prospects. Aggressive investments in R&D to boost product offerings and capabilities might dampen its margins. Also, TEAM currently has a Value Score of F, suggesting a stretched valuation.
Considering all these factors, we suggest investors to stay away from investing in this Zacks Rank #5 (Strong Sell) stock at present.
Image: Bigstock
Atlassian Plunges 30% YTD: How Should Investors Play the Stock?
Shares of Atlassian (TEAM - Free Report) , a prominent player in enterprise collaboration and workflow software space, have plunged 30.3% year to date (YTD). Meanwhile, the Zacks Internet - Software industry in which the stock belongs has gained 14.9% in the year-to-date period.
TEAM stock has also underperformed the Zacks Computer and Technology Sector and S&P 500 index in the YTD period. The Zacks Computer and Technology sector and S&P 500 index have returned 20.7% and 18.4%, respectively, YTD.
Given Atlassian's reputation as a leader in the enterprise collaboration and workflow software space, this underperformance is disappointing. This raises a crucial question for investors — Is it time to sell Atlassian stock?
Atlassian’s Sluggish Growth: A Major Red Flag
One of the most alarming trends for Atlassian is its sluggish sales growth. The company’s sales growth has been continuously decelerating in the post-pandemic era. In the last two fiscals, it had posted revenue growth in the low-to-mid 20s percentage range compared with mid-30s percentage range growth in fiscal 2022.
Atlassian’s forecast for first-quarter fiscal 2025 and the consensus estimate for the upcoming two fiscals indicate a further deceleration in revenue growth. For the fiscal first quarter, it anticipates revenues between $1.149 billion and $1.157 billion, reflecting year-over-year growth of 17.5-18.3%. The Zacks Consensus Estimate for fiscal 2025 and 2026 revenues reflect a year-over-year increase of 15.9% and 18.9%, respectively.
Another near-term headwind for the stock is rising research and development (R&D) costs driven by increased investment in artificial intelligence to enhance its product capabilities. In the last reported financial results for fourth-quarter fiscal 2024, its non-GAAP R&D expenses soared 27.5% year over year compared with revenue growth of 20.5%. Increased R&D expenses negatively impacted profitability, with non-GAAP operating margin contracting 200 basis points.
Atlassian YTD Performance
Image Source: Zacks Investment Research
Atlassian’s decelerating customer growth rate makes us increasingly cautious about its near-term prospects. The company’s customers have witnessed a CAGR of 14.7% between fiscal 2020 and 2024, much lower than the 30% CAGR it registered between fiscal 2016 and 2020.
Macro Uncertainties & Competition to Hurt TEAM’s Prospects
Atlassian’s near-term prospects might be hurt by softening IT spending. Enterprises are postponing their large IT spending plans due to a weakening global economy amid ongoing macroeconomic and geopolitical issues. This does not bode well for Atlassian’s prospects in the near term.
Although Atlassian has long been a strong contender in the collaboration and workflow software space, the market has continuously been crowded by industry leaders like Broadcom (AVGO - Free Report) , Microsoft (MSFT - Free Report) , Alphabet (GOOGL - Free Report) , Salesforce and IBM.
Atlassian’s JIRA software matches solutions like Broadcom’s Rally Software, Microsoft’s Azure DevOps Server and IBM’s Rational. TEAM’s Confluence product competes with Salesforce Chatter and Alphabet’s Google Apps for Work.
Intensifying competition could force Atlassian to resort to competitive pricing to safeguard its market share. This will ultimately impact its profitability.
What Investors Should Do With TEAM Stock
Atlassian’s near-term prospects might be hurt by softening IT spending amid ongoing macroeconomic uncertainties. The decelerating sales and customer growth rate also makes us increasingly cautious about its near-term prospects. Aggressive investments in R&D to boost product offerings and capabilities might dampen its margins. Also, TEAM currently has a Value Score of F, suggesting a stretched valuation.
Considering all these factors, we suggest investors to stay away from investing in this Zacks Rank #5 (Strong Sell) stock at present.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.