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# Is It Too Late to Buy Atlassian Stock? Atlassian’s (NASDAQ: TEAM) stock has seen a strong rally of nearly 60% this year. Investors have become optimistic about the enterprise software company as its revenue growth stabilizes and its operating margins expand. In this article, we will review Atlassian’s business model, growth rates, and valuations to determine if it is still a good time to invest in the stock. ## Stabilizing Growth and Evolving Business Model Atlassian was founded over two decades ago in Australia. Its two major products, Jira and Confluence, have helped companies plan and track software products and collaborate on documents, respectively. As of the end of fiscal 2023, Atlassian served 262,337 customers across its cloud, enterprise, and IT service management platforms. This represents an 8% growth from the previous fiscal year. In the fourth quarter of fiscal 2023, 60% of Atlassian’s revenue came from its cloud platform, while the rest came from its data center (25%), server (9%), and marketplace and services (6%) platforms. Here are the revenue growth rates for these four businesses over the past year: – Cloud: 30% – Data center: 46% – Server: -27% – Marketplace and services: 17% Atlassian is currently migrating its server-based customers to its cloud and data center platforms and plans to discontinue support for its server business in February 2024. This shift explains the decline in server revenue and the projected drop to zero by the fourth quarter of fiscal 2024. While the cloud-based business experienced a slowdown due to macro headwinds, the data center unit grew slightly as it absorbed server-based customers. The marketplace and services segment continued to grow as Atlassian expanded its marketplace for third-party apps and subscription-based support services. For the first quarter of fiscal 2024, Atlassian expects its revenue to increase by 18% to 20% year over year, with cloud revenue growth projected at 25% to 27%. However, no specific guidance was provided for total revenue. Analysts anticipate an 18% growth for the full year, lower than the 26% growth in fiscal 2023. ## Margins and Valuations Over the past year, Atlassian maintained adjusted gross margins in the mid-80s, indicating strong pricing power. Cost-cutting measures, including layoffs, boosted its adjusted operating margins. However, for the first quarter of fiscal 2024, Atlassian expects adjusted gross margins to dip to 83.5%, and adjusted operating margins to decrease sequentially to 19.5%. For the full year, it predicts adjusted gross margins to decline by 130 basis points year over year to 83.5%, and adjusted operating margins to decrease by 190 basis points to 18.5%. During the fiscal fourth-quarter conference call, co-CEO Scott Farquhar attributed the margin compression to increased investments in the enterprise cloud platform, cloud-based migrations, and the development of new IT service management products. Farquhar believes fiscal 2024 will represent the lowest point for operating margins, with a subsequent rise back to historical norms in the coming years. While no guidance was provided for near-term profits, analysts still anticipate a 31% year-over-year increase in adjusted earnings per share (EPS) for the first quarter and an 11% increase for the full year. However, considering Atlassian’s downbeat margin outlook, the stock may still appear expensive at 95 times forward earnings. Comparatively, ServiceNow, a bigger cloud-based peer, is expected to grow its adjusted EPS by 31% this year and trades at just 47 times forward earnings. ## Considerations and Conclusion Investors should note that Atlassian is still unprofitable based on generally accepted accounting principles (GAAP) and has a high debt-to-equity ratio of 5.3. These fundamental weaknesses, along with the stock’s high valuation, may make it vulnerable to bearish sentiments in a high-interest-rate environment. In summary, while Atlassian continues to grow, the stock appears overvalued at present. It may be wise to wait for its valuations to cool off, observe progress towards generating GAAP profits, and monitor steps taken to reduce leverage before considering an investment in the stock. *Find out why Atlassian is one of the 10 best stocks to buy now! Visit the full article for the list of top picks.* – Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Atlassian and ServiceNow. The Motley Fool has a disclosure policy. *Stock Advisor returns as of September 11, 2023.*
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