Shares of Atlassian (TEAM 1.45%) sank on Friday after the enterprise collaboration software company reported results for its fiscal 2024 third quarter. As of 2:25 p.m. ET, Atlassian stock was down about 9.9%.
A strong quarter, but...
In the period, which ended March 31, Atlassian generated revenue of almost $1.2 billion, which was up 30% year over year and ahead of the expectations of most analysts. Moreover, the company generated cash from operations of $565 million, which was up an impressive 60%. But most analysts are lowering their outlook for Atlassian stock nonetheless because there's important context with some of the numbers.
Atlassian is a software company focused on enterprise migration to the cloud. But according to The Fly, Oppenheimer analyst Ittai Kidron has pointed out that the company's fiscal Q3 numbers were supported by better-than-expected results from its data center and marketplace segments.
Non-cloud sources of revenue are winding down for Atlassian, and the cloud is the future. Because the company outperformed in those other areas, analysts are casting doubt on its revenue potential in the coming quarters. And these doubts are giving investors a reason to sell the stock.
Looking ahead
Atlassian also threw investors another curve ball Friday by announcing that co-founder Scott Farquhar is stepping down from his position as co-CEO. Considering that he owns almost 20% of the company, this is a change that might alarm some investors. One fear is that he could start walking away from the company and selling his position.
I believe there's little cause for alarm in this regard. Atlassian's other co-founder and co-CEO, Mike Cannon-Brookes, has been the more visible leader, and I doubt any big operational changes are coming. In other words, there'll be stability. And Farquhar is staying involved as a member of the board of directors and an advisor to the company, so I doubt he'll substantially shrink his position.
Additionally, I can appreciate concerns over Atlassian's cloud growth outlook. Yet at the same time, Q3 cloud revenue was up 31%, an acceleration from its 27% growth in the previous quarter. That's still quite strong.
I won't call Atlassian stock cheap at 11 times trailing sales. But it is approaching the cheapest valuation it has had by that metric in its time as a public company. It's still executing well, and the fears about its future seem overblown. Therefore, this may be a stock to keep an eye on because it could surprise to the positive side in coming quarters.
