AI Investments Will Improve Product Capabilities And Customer Engagement

Key Takeaways

• Strategic investment in AI and focus on enterprise customers suggest strong potential for revenue growth and increased customer engagement.
  
• Migration to cloud solutions and improved cloud margins indicate promising revenue expansion and profitability.
  
• Execution risks in enterprise strategies, AI competition, and macroeconomic uncertainties could impact revenue growth, while gradual cloud migration affects projections.

Catalysts

Through its subsidiaries, designs, develops, licenses, and maintains various software products worldwide.

• Atlassian's investment in AI innovations, such as Atlassian Intelligence and Rovo, is leading to increased customer interaction and monetization through Premium and Enterprise editions, suggesting potential for revenue growth through enhanced product capabilities.
  
• The strategic focus on enterprise customers, with a growing sales and marketing team and record $1 million+ annual contract values, is expected to boost revenue as these larger accounts expand their usage across their organizations.
  
• The ongoing migration of data center customers to cloud solutions, with hybrid enterprise license agreements providing flexibility, reflects an expected transition that can drive cloud revenue growth as customers leverage the benefits of Atlassian's cloud offerings.
  
• The stable macro environment and investments in enterprise go-to-market strategies, particularly targeting large-scale enterprise deals, indicate potential for revenue expansion through increased penetration in Fortune 500 companies.
  
• Atlassian's cloud gross margin improvements driven by AI-driven Premium upgrades and cost optimization efforts suggest potential margin benefits, which could positively impact earnings as cloud revenue becomes a larger portion of the overall revenue mix.

Atlassian Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atlassian's revenue will grow by 19.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -7.2% today to 4.1% in 3 years time.
• Analysts expect earnings to reach $327.3 million (and earnings per share of $1.41) by about February 2028, up from $-346.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 299.8x on those 2028 earnings, up from -230.8x today. This future PE is greater than the current PE for the US Software industry at 41.2x.
• Analysts expect the number of shares outstanding to decline by 3.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Atlassian Future Earnings Per Share Growth

Risks

• The shift from Data Center to Cloud is gradual, with many large enterprises still on hybrid models, which may slow cloud revenue growth if migrations do not accelerate. This impacts revenue growth projections for the cloud segment.
  
• Intense competition in the AI space with many companies building AI agents could challenge Atlassian's ability to differentiate, potentially impacting its market share and thus future revenues.
  
• While AI-driven automation could increase productivity, there are concerns among investors about the potential for AI to cannibalize user growth by reducing demand for user seats, impacting license and subscription revenues.
  
• Macroeconomic uncertainties pose risks to growth, especially within the SMB segment, which affects the stability and future growth of revenues from this customer base.
  
• Aggressive investment in enterprise go-to-market strategies carries execution risk; any missteps or delays in achieving desired penetration with C-level executives may impact expected revenue acceleration from large enterprise accounts.

Valuation

• The analysts have a consensus price target of $345.3 for Atlassian based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $420.0, and the most bearish reporting a price target of just $256.11.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.1 billion, earnings will come to $327.3 million, and it would be trading on a PE ratio of 299.8x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $306.78, the analyst's price target of $345.3 is 11.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.