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I believe that Atlassian is now a classic undervalued stock if we look at forward looking financials. They have been steadily growing at 20-25% p.a. (last quarter was 22%), have excellent margins, a defensible moat and consistently cashflow positive. I believe it is oversold for a few significant reasons which I’ll list below.
**Cashflow is obliterated by SBC**
Over the last few years cashflow has consistently matched SBC which means that technically the company is cashflow neutral. However, that’s not where a 13,000 employee $5.5B revenue company should be and I think management now realises that. A lot of the SBC is due to the vesting period of new hires (4 years) and the significant hiring spree that Atlassian went through during COVID. They’ve now slowed hiring (to the point of putting in a freeze) and have cut their workforce by 10%. This will start to produce a sizeable delta between FCF and SBC over the next 12-24 months. They’ve also started a stock buyback to negate the previous dilution of shares which is likely putting a floor under Atlassian’s share price right now.
**Consistent GAAP losses**
Atlassian has consistently made losses under GAAP and it’s primarily due to SBC. With that starting to have less of an impact going forward, we would expect Atlassian to start making consistent profits (and actually have a P/E ratio!). Another factor is that, with cuts across the industry taking place, there will be downward pressure on salaries which will help improve profits even further. Once Atlassian starts making consistent profits they can finally join the S&P 500 which will help propel the stock higher.
**AI will make Atlassian’s products obsolete**
I find this hard to believe and I would have expected to see Atlassian’s revenue growth start to taper off if AI products were going to have an impact. However, their growth last quarter was an extremely solid 22% and margins were unchanged. In fact, it was indicated by management that there was revenue growth due to AI products in their suite (Rovo as an example).
There’s also lots of consternation that companies will simply Vibe Code a product to replace Atlassian’s products and there is some merit to that, but only in small companies. As an example, in a startup that has a particular non-JIRA workflow, there may be merit in building their own product to help the team. However, that product will need to be maintained which will require team members to invest time into it, negating any cost savings vs. acquiring Atlassian’s products. In large corporations it’s even worse - there’s practically no chance that the corporate environment will allow an effective product to be Vibe Coded. Even if they do, they’ll need to replace the trust infrastructure that Atlassian already has - as an example there’s no chance that a Vibe Coded product will pass SOC 2 without lots of effort from a team of engineers. So I don’t think Atlassian’s products are going anywhere.
With the above in mind, I don’t think AI will reduce Atlassian’s growth. In fact, I believe AI is a means for Atlassian to increase revenue growth by utilising the information that companies have already shared with it to then create new products in new markets. After all, AI needs context in order to assist knowledge workers and Atlassian already has that in the Teamwork Graph. They can also leverage this context to move into new markets by either creating their own AI powered products or - even better - create a marketplace for agents. I can see them moving into HR, travel, accounting etc. simply by leveraging the knowledge companies have already give them.
**Conclusion**
Atlassian’s share price has been heavily sold off and the market cap has fallen below a level that makes sense when looking forward. They have consistently high gross margins (85%), strong NRR (above 120%), solid revenue growth (above 20%) and AI allowing them to expand into new markets. I believe that the best has yet to come for Atlassian and I’'m therefore long.