Bear of the Day: Atlassian (TEAM)

Despite being a global leader and innovator in the enterprise collaboration and workflow software space, Atlassian TEAM has faced increased competition from a growing number of notable competitors, including Microsoft MSFT, ServiceNow NOW, and Monday.com MNDY.

Making matters worse is that Atlassian's stock has been under increased pressure due to heavy insider selling, slower growth, and disappointing guidance.

Unfortunately, with TEAM shares down nearly 20% this year, more risk appears to be ahead as Atlassian stock still trades at a somewhat stretched valuation. 

Heavy Insider Selling

Notably, cause for concern has been raised after Atlassian’s founders, Scott Farquhar and Michael Cannon-Brookes, reportedly sold millions of dollars’ worth of TEAM shares earlier in the month.

More concerning, over the last year, insiders have now dumped over 4 million TEAM shares worth $800 million, with no insider purchases made during this period.

Atlassian’s Soft Revenue Guidance

Although Atlassian was most recently able to surpass expectations for its fiscal third quarter in early May, slower growth from the comparative period further caught investors' attention as the company’s guidance for Q4 revenue of $1.35-$1.36 billion was below most analysts' expectations of $1.42 billion.

This comes as Atlassian’s rapid sales growth has previously justified the earnings premium investors have paid in the past, although it's noteworthy that the company has been public since 2015.

Also worth mentioning is that Atlassian emphasized that it’s trading short-term revenue upside for long-term platform adoption, especially by bundling its AI assistant Rovo into Premium and Enterprise subscriptions at no extra cost. Still, while AI is a strategic priority, it’s also driving up Atlassian’s expenses and dimming margins.

Atlassian’s Lofty Valuation

Amid concerns that Atlassian can maintain its growth trajectory, TEAM is still trading at almost $200 a share and 47.3X forward earnings. While tech stocks can often command a premium to the benchmark S&P 500, which is at 24X, Atlassian stock trades noticeably above its Zacks Internet-Software Industry average of 29.1X as well.

In terms of price-to-sales, Atlassian’s forward P/S ratio of 8.3X is also stretched compared to its industry average of 6.3X and the S&P 500’s 5.4X.

Bottom Line

While the strategic move to ramp up AI integration in its collaboration and workflow software services will hopefully pay off down the line, it may be best to avoid Atlassian’s stock at the moment. To that point, there are more viable investment options to consider as it relates to internet-software stocks, with Microsoft being a prime example as a more refined leader and an emerging competitor to Atlassian. 

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This article originally published on Zacks Investment Research (zacks.com).

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