Billion Dollar Unicorns: Atlassian is Doing Everything Right, But is it Too Expensive?

According to TechSci Research, the global collaboration software market was worth $4.78 billion in 2016. It was estimated to grow 10% annually to $8.96 billion by 2022 driven by the increasing adoption of bring your own device policies at work places. Billion Dollar Unicorn Atlassian (Nasdaq: TEAM) is an established player in the market. Since listing, the company has had a solid run, and why not – it is a rock solid company, always focused on fundamentals!

Atlassian’s Financials

Atlassian recently announced its second quarter results that surpassed market expectations on all fronts. Revenues grew 43% to $212.6 million, ahead of the Street’s forecast of $204 million. EPS of $0.13 was also a cent ahead of the Street’s forecast. During the quarter, Atlassian had recorded a non-cash charge to income tax expense of $47.3 million due to a write-down of deferred tax assets.

By segment, revenues from subscription services grew 72% to $96.8 million, maintenance grew 24% to $80.4 million, perpetual license increased 20% to $21.8 million, and other revenues grew 58% to $14.7 million.

Atlassian ended the first quarter with a total customer count of 112,571. It added 4,285 net new customers in the quarter. It also expanded its Marketplace segment and now has more than 3,500 apps. Overall, its business apps revenues surpassed $350 million in lifetime sales since its launch in 2012.

For the current quarter, Atlassian expects revenues of $217-$219 million, and a non-IFRS EPS of $0.08. It expects to end the year with revenues of $853-$857 million and non-IFRS EPS of $0.47-$0.48. The Street was looking for revenues of $215 million and an EPS of $0.08 for the quarter and revenues of $842 million with an EPS of $0.46 for the year.

Atlassian’s Stride

Last year, Atlassian had introduced its latest team communication solution called Stride in direct competition with Slack. Stride was released as an early access program as the company is still working on rolling it out to its existing HipChat Cloud customers. Stride has some good features such as the ability to create a task out of a text post. Stride also includes video conferencing, audio call, and screen sharing options. But it lacks some of key features such as the high customization offered by Slack and task-management views offered by RingCentral.

Atlassian is working on phasing out Hipchat to replace it with Stride. It still does not have a clear timeline of the changeover. Right now, Stride is available as a web app, a desktop app for macOS, Windows, and Linux, and as mobile apps for iOS and Android.

Initially, Stride will be available in two price tiers. The free service will come with unlimited users, group chat rooms, direct messaging, and group video chat; file sharing and 5GB storage; 10 apps or bots; Actions and Decisions coordination; and message history up to 25,000 messages.

The premium version will be priced at $3 per user per month, and will include additional features such as advanced native Stride Meetings functionality; unlimited file sharing and storage, apps and bots, and message history; guest access; and user management.

For comparison, Slack costs $8 per month per user, and RingCentral charges $5 per user per month for its service.

Despite the impressive performance, Atlassian’s stock fell nearly 5% post result announcement. Many believe that the decline was just a reaction of the market toward normalizing valuation. The stock has been trading at 12 times its revenue multiple, making it an already expensive stock. For now, the stock is trading at $52.26 with a market cap of $11.8 billion. It has been steadily climbing from the 52-week low of $26.97 in January last year. It peaked to $55.91 last week in anticipation of the results.

I am very bullish on this company primarily because it has a culture that has been focused on fundamentals for the longest time. I expect that it will continue to deliver solid results. The stock may be running slightly ahead of itself, but there is absolutely nothing wrong with the company. Going after Slack is the right strategy for them at the moment, and I expect, they will figure out how to do so successfully within this year.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns.

This segment is a part in the series : Billion Dollar Unicorns