AI Integration Will Strengthen Cloud And Government Services

Key Takeaways

• Integration of AI and strategic cloud advancements are key to driving long-term revenue growth through product stickiness and enterprise adoption.
  
• Cloud cost efficiencies and infrastructure optimizations will sustain high margins, supporting investment in AI and future technology growth opportunities.
  
• Dynamics like elongated deal cycles, cloud migration timing, and discounted bundling may lead to variability and challenges in achieving consistent revenue growth.

Catalysts

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

• The integration of Rovo's AI capabilities into Atlassian's core cloud products is expected to drive user expansion and long-term revenue growth by enhancing product stickiness and promoting platform-wide adoption among knowledge workers. (Impacts: Revenue Growth)
  
• Strategic advancements such as FedRAMP Moderate authorization and the introduction of Atlassian Government Cloud and Isolated Cloud are anticipated to unlock significant opportunities with large and complex enterprises, leading to potential increases in cloud adoption and enterprise deal volume. (Impacts: Revenue Growth)
  
• The multi-year investment into Atlassian's System of Work and AI integration provides a strong foundation for future growth by driving more seamless collaboration between technology and business teams amidst increasing enterprise demands. (Impacts: Revenue Growth, Net Margins)
  
• Ongoing enhancements in cloud cost efficiencies and infrastructure optimizations are expected to sustain high gross margins and free cash flow, providing additional leverage for Atlassian's growth and investment strategy in AI and other high-value technology enhancements. (Impacts: Net Margins, Earnings)
  
• Efforts to simplify customer procurement and expand product usage through the Teamwork Collection are positioned to drive additional Confluence and Loom attachments and seat expansion, promoting long-term revenue growth and strengthening structural competitive advantages. (Impacts: Revenue Growth)

Atlassian Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atlassian's revenue will grow by 18.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -8.7% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $493.9 million (and earnings per share of $0.57) by about May 2028, up from $-429.7 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 190.3x on those 2028 earnings, up from -127.0x today. This future PE is greater than the current PE for the US Software industry at 33.3x.
• Analysts expect the number of shares outstanding to grow by 0.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Atlassian Future Earnings Per Share Growth

Risks

• There is mention of embedding Rovo into core products potentially being a trade-off for near-term revenue growth, suggesting some decisions could impact revenue trajectories.
  
• The discussion highlights elongated deal cycles in the enterprise segment, which may impact revenue recognition and potentially affect quarterly revenues.
  
• The commentary around cloud migrations being more backend-loaded could indicate some uncertainty in cloud revenue growth consistency.
  
• Data center revenue growth was impacted by changes in deal duration, which can lead to variability in revenue recognition processes and affect revenue forecasts.
  
• The impact of introducing Teamwork Collections and the potential discounting involved could affect revenue per user and slow overall revenue growth if the bundled pricing reduces per-unit value.

Valuation

• The analysts have a consensus price target of $279.952 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 $215.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.3 billion, earnings will come to $493.9 million, and it would be trading on a PE ratio of 190.3x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $207.89, the analyst price target of $279.95 is 25.7% 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.