Why Atlassian (TEAM) Stock Is Nosediving
What Happened:
Shares of IT project management software company, Atlassian (NASDAQ:TEAM) fell 15.4% in the afternoon session after the company reported second-quarter earnings results and provided a mixed outlook for the coming quarters. In a letter to shareholders, management expects more unpredictable decisions from customers migrating to the cloud following the server end-of-support in February 2024. It added, "While some of the remaining Server customers will migrate to Cloud, the majority will migrate to Data Center, and also prudently assumes that some Server customers will not migrate in FY24."
CFO Joe Binz explained further during the earnings call, "If there was any weakness in our cloud performance versus expectations, it's that paid seat expansion has been lower than we expected, and this quarter, it was slightly lower than we expected, particularly in SMB." These comments likely spooked Wall Street analysts, with Goldman Sachs analyst Kash Rangan commenting, "As weakness from small and medium-sized business weighed on growth, Altassian's cloud transition might wind up taking longer than expected."
On a more positive note, revenue and EPS exceeded expectations during the quarter. Revenue guidance for the next quarter also topped analysts' expectations. Full-year guidance was also promising, with Cloud and Data Center revenue outlook raised. Higher growth is not hurting profits, as the outlook for full-year non-GAAP operating margin was lifted as well. Overall, this was a mixed quarter, with the results likely overshadowed by worries about the slow cloud migration.
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What is the market telling us:
Atlassian's shares are very volatile and over the last year have had 25 moves greater than 5%. But moves this big are very rare even for Atlassian and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 3 months ago, when the stock dropped 14.3% on the news that the company reported first quarter results with revenue guidance for next quarter falling below analysts' expectations. Management expects ongoing macroeconomic uncertainties to hurt growth in paid seat expansion and free-to-paid conversion rates, assuming that the trends observed in the past year persisted into FY24.
Additionally, they anticipate varying Cloud and Data Center revenue growth rates as customers migrate to the new platform following the end-of-support for the Server offering, assuming that migration rates will follow historical trends and some Server customers may not migrate in FY24. On the other hand, Atlassian narrowly topped analysts' revenue expectations during the quarter. For the full year, cloud revenue growth was reaffirmed, and operating margin guidance was raised. However, next quarter's soft revenue outlook seems to be weighing on shares. Overall, the results could have been better.
Atlassian is down 3.8% since the beginning of the year, and at $217.80 per share it is trading 15.4% below its 52-week high of $257.43 from January 2024. Investors who bought $1,000 worth of Atlassian's shares 5 years ago would now be looking at an investment worth $2,135.
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