As cloud stocks continue to wither, Atlassian has 'substantial momentum' behind it: Baird
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The valuations of cloud computing and software-as-a-service stocks have been hit hard in 2022, as the Federal Reserve combats inflation by raising interest rates and investors worry about a global economic slowdown.
And while many tech investors have struggled to find places to hide, investment firm Baird notes that Atlassian (NASDAQ:TEAM) may be the answer.
Analyst Rob Oliver, who rates Atlassian (TEAM) shares at outperform, said the company is the firm's top large-cap idea and there is the potential for $10 per share in free cash flow in fiscal 2026.
"Atlassian has substantial momentum around cloud transition, industry tailwinds," Oliver said, adding that the company has "strong positioning" in areas such as enterprise growth, DevOps, IT service and workflow."
Oliver said that Atlassian (TEAM) which is continuing its push into the cloud, could see some near-term pressure on margins, but the future is bright and current headwinds can act as a "favorable longer-term entry point."
According to a recent report from venture capital firm Battery Ventures, the valuations of many large private and public cloud companies have plunged over the past 10 months. At the end of 2021, 16 companies, including Atlassian (TEAM), Asana (ASAN) and Snowflake (SNOW), traded at 25 times revenue.
That number fell to just seven companies by the end of March, and by the end of June, there were none.
And only nine companies traded between 15 and 25 times 2022 revenues, including Atlassian (TEAM), Snowflake (SNOW) and MongoDB (MDB), compared to 16 companies at the end of 2021.
Even though valuations have declined and the global economy has weakened considerably, Atlassian (TEAM) has been able to generate strong free cash flow. Oliver expects there is the potential to generate $10 per share in free cash flow by 2026, along with free cash flow margins of 36.6%.
And though the transition to the cloud could hurt margins in the near-term, Atlassian (TEAM) is likely to keep generating 50% year-over-year in fiscal 2023 and 2024.
"While the recovery path is not likely to be linear, we think our assumptions are reasonable, and at the very least provide a constructive baseline for further work," Oliver explained.
Last month, hedge fund Lone Pine Capital disclosed that had started a 1.6M share position in Atlassian (TEAM), along with several other changes to its portfolio.