(2022-06-27) Schwab Atlassian Is 20 Years Old And Unprofitable; The Market Has Its Valuation All Wrong

Atlassian is 20 years old and unprofitable — the market has its valuation all wrong, says Adam Schwab. Until a few months ago, no company had created more wealth for its shareholders than Sydney-grown Atlassian. At its peak in October 2021, the Nasdaq-listed business was valued $162 billion. ($445/share) (Jun'2022 low $178/sh; 2023 low $118/sh)

• Feb'2024: they have 10k employees! Stock $219/sh.

the tech sector has rapidly corrected, with high-profile stocks like Netflix (down 72%), Zoom (down 79%) and Meta (down 56%) hammered

Atlassian hasn’t been immune from the carnage, collapsing 55% from its bubble induced highs.

That drop however may be just the tip of the iceberg

In its most recent earnings report released in April, Atlassian announced that revenue for the past nine months grew from US$1.5 billion to US$2.04 billion ($2.95 billion) (or around 24%).

Even with the near 60% share price calamity, Atlassian is trading on a multiple of more than 19 times sales

But Atlassian’s major problem isn’t only that it’s not profitable (Jeff Bezos showed lack of profitability over decades can be forgivable), but that its business is growing a lot more slowly than it used to and it now needs to spend a lot of money on marketing to achieve that growth.

Even more ominously, for a business that would regularly boast of not having a single salesperson, this year Atlassian is spending almost US$600 million ($866 million) on sales and marketing. Combined with employing more than 8000 people...

losing more than US$500 million ($722 million) for the first nine months of this year.

While Atlassian will point to its positive operating cashflow as a proxy for EBITDA, Atlassian’s cash flows are positive only because it uses lots of equity to pay its employees

This leads to an even bigger problem

Working for Atlassian has recently become a lot less lucrative. Most Atlassian employees who received equity in the last two years are likely to be underwater

While it is still used by many tech businesses (including the author’s), it has no real network effect — that is, users can switch to a competitor product like Asana, Basecamp or Monday.com with minimal cost (other than the initial hassle of switching to a new system).

Salesforce.com, another giant enterprise software business with a similar growth profile and profitability trades on a multiple of less than six times annual revenue.