Rovo AI And FedRAMP Will Expand Secular Cloud Adoption

Key Takeaways

• Integration of advanced AI and expansion into regulated cloud markets will significantly accelerate user growth, platform lock-in, and long-term revenue potential beyond expectations.
  
• Focus on digital collaboration, marketplace expansion, and AI-driven infrastructure will drive superior retention, recurring revenue, and sustained industry-leading margins.
  
• Rising compliance costs, fierce competition, product dependency, aggressive AI investment, and complex enterprise sales cycles threaten profitability, pricing power, and long-term revenue growth.

Catalysts

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

• Analysts broadly agree that integrating Rovo's AI into Atlassian's core platform will drive user growth, but the degree of AI adoption is poised to far outpace expectations, as the accelerating shift to AI-powered workflows and Atlassian's inclusion of Rovo in all premium and soon standard plans could foster exponential user expansion and platform lock-in across knowledge workers-positioning revenue to grow well beyond current consensus.
  
• While analysts expect FedRAMP and isolated cloud offerings to unlock large enterprise and government deals, emerging regulatory and security demands across critical industries are set to create a multi-year, step-function surge in high-value enterprise migrations-vastly expanding Atlassian's addressable cloud market and boosting long-term revenue growth and net margins at a faster rate than anticipated.
  
• The lasting changes in work driven by the remote and hybrid paradigm are set to make Atlassian the indispensable backbone of digital collaboration, propelling both seat growth and upsell across its suite as organizations standardize on a single, integrated ecosystem; this structural shift supports superior revenue, retention, and higher ARPU.
  
• Atlassian's rapidly expanding marketplace for third-party apps, integrations, and the enablement of low-code/no-code automation is on track to create entirely new recurring revenue streams while embedding the platform even deeper in customer operations, exerting positive pressure on net dollar retention and lifting long-term earnings power.
  
• The company's deepening focus on cloud infrastructure efficiency and AI-optimized architecture is positioned not just to sustain, but to further expand industry-leading gross margins-which, when coupled with growing free cash flow, yields outsized leverage for high-value reinvestments and potential future capital returns, driving stronger earnings growth than the consensus presently reflects.

Atlassian Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Atlassian compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Atlassian's revenue will grow by 21.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -8.7% today to 7.5% in 3 years time.
• The bullish analysts expect earnings to reach $661.2 million (and earnings per share of $2.5) by about July 2028, up from $-429.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 194.0x on those 2028 earnings, up from -122.2x today. This future PE is greater than the current PE for the US Software industry at 46.9x.
• Analysts expect the number of shares outstanding to grow by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

Atlassian Future Earnings Per Share Growth

Risks

• Intensifying global data privacy, cybersecurity, and data sovereignty regulations are requiring Atlassian to develop offerings like Government Cloud and Isolated Cloud, and while management highlights progress, these compliance and localization efforts could increase operational complexity and cost, potentially reducing margins and constraining future profit growth.
  
• A crowded and rapidly evolving market for collaboration, DevOps, and workflow tools-including increased commoditization, adoption of freemium and lower-cost solutions, and the rise of integrated suites from larger vendors-may pressure Atlassian's pricing power and lead to margin compression or higher customer churn, directly impacting both revenues and earnings.
  
• Atlassian continues to depend heavily on its core products such as Jira and Confluence, as recognized in the focus on expanding attach rates and editions, thus slower product diversification may leave the company exposed to competitive threats and vulnerable to evolving customer expectations, risking long-term revenue growth.
  
• Accelerated investments in AI and platform integration, including embedding Rovo capabilities into core product subscriptions at little or no incremental cost, could drive up R&D and cloud infrastructure spend ahead of proven large-scale monetization, placing future downward pressure on net income and gross margins unless adoption scales profitably.
  
• A shift toward longer and more complex enterprise deal cycles, as noted in the call, alongside an evolving go-to-market strategy and transitioning to enterprise-focused leadership, introduces execution risks that could slow migration, cross-sell, and upsell opportunities-posing the risk of underperformance relative to management's revenue and earnings targets.

Valuation

• The assumed bullish price target for Atlassian is $377.89, which represents two standard deviations above the consensus price target of $274.49. This valuation is based on what can be assumed as the expectations of Atlassian's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $480.0, and the most bearish reporting a price target of just $211.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $8.8 billion, earnings will come to $661.2 million, and it would be trading on a PE ratio of 194.0x, assuming you use a discount rate of 7.9%.
• Given the current share price of $200.06, the bullish analyst price target of $377.89 is 47.1% 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.