Atlassian Cuts Full-Year Guidance – Is This a Sell Signal?

Shares of a labor management software company Atlassian (CREW -28.96%) fell about 30% on Friday, falling to its lowest level in three years. This came after the company released its financial results for the first quarter of its 2023 fiscal year.

Contrary to the decidedly negative market reaction, the headlines have been good for Atlassian. Revenue of $807 million was in the upper range of forecasts and the company added more than 6,500 customers during the quarter.

However, management cut some of its full-year guidance due to issues brewing below the surface. For many investors, this was a clear sell signal for the stock. However, there is much more to the long-term story than that.

Why investors are skipping Atlassian shares

Atlassian has long enjoyed a premium valuation. Even down more than 70% from its all-time high, the stock still trades at a price-to-sales (P/S) ratio of 11, which many believe is still expensive.

This premium valuation was driven by two main factors: impressive revenue growth and strong investor confidence in the company. For perspective, its 31% year-over-year revenue growth last quarter was one of its worst performances as a public company. However, a growth of 31% is not to be overlooked; most companies would say to like grow so fast.

Here’s the shocking first-quarter development: Atlassian cut its full-year revenue guidance. The company is directing its customers to cloud subscription products. Three months ago, management said cloud revenue would grow 50% in fiscal 2023 and again in fiscal 2024. Now, management expects 40% growth to 45% in fiscal year 2023 with no update to fiscal year 2024 in the latest outlook.

By lowering its forecast, Atlassian’s management signaled slower growth ahead and shook investor confidence in the future. By touching these two factors, investors bail out the stock.

And Wall Street is also giving up on Atlassian. For instance, Piper Sandler Analyst James Fish previously called Atlassian stock “overweight.” But today, Fish downgraded its rating to neutral and lowered its price target by 48% to $148 per share, according to The Fly.

How Atlassian is dealing with its problem

To further clarify Atlassian’s problem, it sells software products to businesses, not consumers, and the business of those companies is slowing down. Management has indicated that companies are increasingly willing to stay on Atlassian’s free tier instead of upgrading to unlock paid features.

Additionally, Atlassian’s paying customers pay per seat – in other words, they pay based on the number of employees using the service. However, many tech companies aren’t growing their employee base at all right now, and some are even laying off workers. These trends affect businesses of all sizes — even Apple and Amazon announced hiring freezes, and Microsoft let some people go. Metaplatforms will apparently join the upcoming announcement of layoffs.

Even the world’s biggest tech companies aren’t immune to a downturn in the global economy. How are Atlassian’s 249,000+ customers affected by macroeconomic headwinds? When these customers aren’t increasing their number of employees, they obviously aren’t paying for more seats on Atlassian products.

In other words, Atlassian’s main problem is not the result of any failure on its part. On the contrary, his customers suffer and therefore spend less money.

Faced with a downturn, most companies choose to scale back their growth plans. However, Atlassian does just the opposite. He thinks he can reach $10 billion in annual revenue in the coming years, up from $3 billion in revenue over the past 12 months. And he sees the widespread economic downturn as his main opportunity to move forward.

Specifically, Atlassian believes it can dominate its market by hiring the best people. And while competitors are cutting their labor spend, Atlassian is hiring. Making that point on the recent earnings call, co-founder and co-CEO Scott Farquhar said: “Our experience is that we can come out the other side very strongly by selectively taking over staff that other people let go.”

Atlassian therefore fully intends to continue investing in its business throughout this downtrend. To be perfectly clear: this stock is not for all investors. For starters, the company’s investments will likely weigh on profit margins and have negligible short-term payoffs. Moreover, it risks accumulating too quickly if the economy deteriorates. Therefore, there could indeed be more downside ahead for Atlassian shares.

However, that doesn’t necessarily make Atlassian stock a sell. On the contrary, by playing the long game, management can position the company to take market share once economic conditions improve.

So if you believe in Atlassian’s products and market opportunities – and with the stock trading at its lowest P/S ratio since 2016 – it might be time to take another careful look at the action.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Jon Quast has positions at Amazon. The Motley Fool holds positions and recommends Amazon, Apple, Atlassian, Meta Platforms, Inc. and Microsoft. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.

Comments are closed.