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Atlassian (NASDAQ:), an Australian enterprise software company, has seen its shares rise by nearly 60% this year, underpinned by steady revenue growth and expanding operating margins. The company, known for its key products Jira and Confluence, has been a significant player in the project management and collaboration tools market for over two decades.

As of the end of the fiscal year on June 30, 2023, Atlassian reported an 8% increase in customers across its suite of platforms, reaching a total of 262,337 from 242,623 in the previous fiscal year. The company’s cloud platform accounted for the majority of its revenue in the fourth quarter of fiscal 2023 at 60%, with the remaining revenue generated from its data center (25%), server (9%), and marketplace and services (6%) platforms.

However, revenue growth varied across these segments. In Q4 2023, the cloud segment saw a year-on-year growth of 30%, down from 55% in Q4 2022. The data center segment recorded a robust growth rate of 46%, while the server segment experienced a decline of 27%. The marketplace and services segment saw a growth rate of 17%.

The decline in server revenue is linked to Atlassian’s strategic shift towards cloud and data center platforms. The company is actively transitioning all server-based customers to these platforms and plans to discontinue support for its server business by February 2024.

Despite this strategic shift, Atlassian’s cloud business experienced a slowdown due to macroeconomic factors causing companies to cut back on spending. Conversely, the data center unit fared better as it absorbed more server-based customers. The marketplace and services segment continued to grow due to an expanded marketplace for third-party apps and subscription-based support services.

For fiscal Q1 2024, Atlassian forecasts an 18% to 20% year-over-year increase in revenue, with its cloud revenue expected to rise between 25% and 27%. However, the company did not provide a total revenue outlook. Analysts predict an 18% growth for the full year, down from the 26% growth seen in fiscal 2023.

Despite its impressive growth, Atlassian’s valuation is not considered cheap, with an enterprise value of $50 billion and trading at 13 times this year’s sales. This is comparable to its larger cloud-based peer ServiceNow (NYSE:), which also trades at 13 times its estimated sales and is expected to generate a 23% revenue growth this year.

Atlassian’s adjusted gross margins have remained steady over the past year, indicating strong pricing power. However, the company expects these margins to drop slightly to 83.5% in Q1 of fiscal 2024, with its adjusted operating margin also anticipated to decline to 19.5%. This contraction is attributed to increased investments in the enterprise cloud platform and the development of new IT service management products.

While no guidance was provided on near-term profits, analysts forecast a rise in adjusted earnings per share by 31% year over year in Q1 and by 11% for the full year. Despite the company’s high valuation and unprofitability based on generally accepted accounting principles (GAAP), it continues to attract investors. However, its high debt-to-equity ratio of 5.3 remains a concern.

Given these factors, some investors may be hesitant to buy Atlassian’s stock at its current valuation until it shows progress towards generating GAAP profits and reducing its leverage.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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