With so many high-flying software companies for investors to choose from right now, it’s easy to get overwhelmed when trying to figure out which ones belong in your portfolio for the long-term. Many of these companies are benefitting from secular growth trends and continue to reach new all-time highs in the market, which has resulted in stretched valuations and added risks for growth investors to account for.
Just take a look at what happened to Fastly (NYSE:FSLY) last week for a reminder that software stocks can offer some nasty pullbacks if they aren’t able to meet the market’s lofty expectations.
With that said, there are still some great buys in the software space that could end up rewarding long-term growth investors handsomely. Take Atlassian (NASDAQ:TEAM) for example. This is a software company that offers a range of team collaboration software products and continues to show relative strength in the market.
It looks like a solid buy at this time ahead of the company’s Q1 earnings announcement on Oct. 29. Here are a few reasons why Atlassian is worth a look for growth investors.
Teamwork Makes the Dream Work
Atlassian is a unique software company in that it has created two of the software industry’s most widely used digital management workflow platforms. First, Atlassian offers Trello, which is a collaboration tool that organizes projects into boards that help companies keep track of what is being worked on, who is working on what, and what stage a task or project is in. It’s similar to a digital whiteboard that allows companies to monitor every aspect of a project until it is completed.
Jira is the other main work management tool that the company has created. It can be used for multiple purposes including software development, marketing, content management, professional service management, and more.
With so many companies in need of tools that will help them work better in hybrid and digital work environments, it’s easy to see why Atlassian has been experiencing such strong growth. The company’s work management tools are becoming a critical component to its clients’ success as more and more businesses move into the cloud and pursue digital transformations.
This is especially true for software developers and tech department engineering teams. It’s pretty simple – if a company isn’t able to collaborate well internally on projects, they instantly fall behind the competition in today’s fast-paced digital world. That’s why there is such strong demand for Atlassian’s products.
Huge Potential
The logic behind adding shares of a company like Atlassian is simple enough, but the case for the company is even stronger when you look at the growth numbers it has been putting up over the years. Atlassian has seen customers grow from 138,000 in 2019 to a current customer base of 174,000 as of Q4 2020.
The company estimates that its total addressable market is about 1 million businesses, which means Atlassian has only scratched the surface of its target market.
It’s fair to say that the trend of companies transitioning into the cloud is here to stay, which bodes well for a company like Atlassian that saw subscriptions hit 60% of revenue in Q4 2020. There are also plenty of cross-selling and upsell opportunities that Atlassian can pursue with its current customers that could help the company grow.
Finally, you have to like the substantial pricing power that Atlassian has, which could allow it to continue establishing itself as the leading provider of team collaboration and productivity software worldwide.
Impressive Earnings Growth & Continued Acquisitions
When it comes to assessing a software company like Atlassian, you want the earnings of the company to support the growth thesis. This is especially important since you are paying a premium valuation for a company that is still striving towards profitability.
That’s another great reason to consider adding shares of Atlassian, as the company has seen earnings grow by 52% over the last three years.
While in Q4 the company reported a Net Loss of $385.2 million, there are reasons for optimism thanks to improving free cash flow margins and total revenue of $430.5 million, up 29% year-over-year. As long as the company continues to see 25%+ top-line growth, it should be able to scale up and expand operating margins in a big way.
Atlassian also continues to make smart acquisitions including two interesting prospects in Q4, Halp, and Mindville. Halp is an application that transforms Slack into an internal help desk solution for any team inside an organization while Mindville is a critical configuration management database that should help to improve Jira.
Final Thoughts
There are so many different software companies out there to choose from at this time, which means that a stock like Atlassian is flying under the radar. While there are risks for these types of stocks including higher than average volatility when the market pulls back and lots of analyst optimism, there is still a lot to like about this company’s business model and its unique products that are helping teams collaborate efficiently during the cloud-era. Look to add shares on major pullbacks or wait until after the company’s earnings release later this month for more insight.