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• The TEAM share price has dropped by 70% from its all-time high.
• It has also slipped by 40% from its year-to-date high.
• The rule of 40 approach shows that it is overvalued.

Atlassian (TEAM) stock price has been a big loser in 2024, shedding over 40% of its valuation amid concerns about its growth and competition. It was trading at $142 on Friday, down by over 70% from its all-time high (ATH). 

Atlassian has grown well
 

Atlassian is one of the top companies in the Software as a Service (SaaS) industry, where it provides some of the best-known communication and project management tools.

Its best-known solutions are Jira, Confluence, and Trello. It also owns some more products like Rovo and Guard.

Over the years, Atlassian has grown its market share among enterprises and demonstrated substantial revenue growth.

Data by SeekingAlpha shows that its total revenue has risen from over $1.6 billion in 2020 to over $4.3 billion. This growth happened organically and through acquisitions, with the most notable buyouts being Trello, Code Barrel, and Loom.

The challenge, however, is that the company has failed to become profitable as its annual losses have totaled over $2 billion. 

Atlassian’s financial results
 

The most recent catalyst for the Atlassian stock dip was the company’s financial results. Its recent results showed that its revenue rose to over $1.12 billion in the three months to June, up from over $939 million in the same period in 2023. 

Most of these numbers came from its cloud segment, which made over $738 million followed by data center’s $326 million. 

The company’s guidance was also weaker than expected. It expects to make between $1.14 billion and $1.15 billion in revenue. Its cloud and data center revenue growth is expected to be 27% and 35%, respectively. 

Atlassian has major challenges ahead
 

The TEAM’s stock retreat happened as investors anticipated major challenges ahead. First, there are concerns about the company’s future growth trajectory, especially among large customers. 

Atlassian is now used by over 300,000 companies from around the world. It counts 80% of all companies in the Fortune 500 index as customers. Some of the top companies are firms like Adobe, Spotify, Tesla, and Airbnb.

On the positive side, most of these companies don’t change their communication and project management solutions often. As a result, Atlassian has a relatively small churn. 

Also, the company benefits from upselling its products to existing customers. For example, a Jira customer can also subscribe to Confluence, a place to create, share, and harness knowledge across teams. 

Additionally, Atlassian has the potential to grow its margins when it moves from the current growth phase. It generated a gross margin of 81% and a net profit margin of minus 6.90%. 

In the future, it could replicate Salesforce’s profit margin of 15.30% or Adobe’s 24% and Microsoft’s 35%. Other large SaaS companies like Workday, Intuit, and Oracle have margins of over 15%. 

Atlassian expects its revenue to grow to $5 billion and $6 billion in 2025 and 2026, respectively. A 15% profit margin means that it would generate almost $1 billion in profits.

The biggest challenge is that the company is that the number of net customer additions will continue growing but at a slower pace. 

In addition, the company is in a highly competitive industry. Some of its biggest competitors are firms like Microsoft, which owns Teams, Asana, which competes with Trello and Jira, Slack, monday.com, Zendesk, and GitLab.

These competitors are its best-known ones. It also competes with other smaller companies like ClickUp and Notion. 

TEAM is overvalued
 

Further, there are signs that the company is highly overvalued. While its market cap has dropped to $37 billion, it trades at an EV-to-sales multiple of 8 and a price-to-sales ratio of 8.25, higher than the industry average of 8. 

For SAAS companies like Atlassian, one of the best valuation approaches is to look at its rule of 40 metric. This is a popular approach that looks at a company’s growth and margins. 

In Atlassian’s case, the company has provided a revenue guidance of 16% and a GAAP operating margin of minus 6%, and a non-GAAP margin of 25%.

In this case, using its GAAP figures, then it means that it has a rule of 40 figure of 10 and a non-GAAP figure of 37. A figure of less than 40 is a sign that a company is focusing too much on growth instead of profits and that it is overvalued.

Atlassian stock price forecast
 

The weekly chart shows that the TEAM share price has made a strong bearish breakout in the past few weeks. It has dropped from this year’s high of $260 to $141. Most recently, it moved below the lower side of the ascending channel. 

It has also dropped below the 50-week and 100-week moving averages while the Relative Strength Index (RSI) is approaching the oversold level. Therefore, the stock will likely continue falling as sellers target the key support level at $115, its lowest point in 2022.

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