Atlassian Stock: Taking Another Look Atlassian (NASDAQ: TEAM) stock is down over 60% over its high. Atlassian is a software company based out of Sydney and San Francisco.

Atlassian (NASDAQ: TEAM) stock is down over 60% over its high. Atlassian is a software company based out of Sydney and San Francisco. It produces products that help software developers, project managers, and other software development-related teams. They cater to three markets: Agile and DevOps, IT service and Management, and Work Management for All. It has multiple brands under its canopy, including Jira, Trello, and Agilecraft, and competes with numerous software companies, such as; Github, Gitlab, Microsoft, Asana, and IBM.

Down over 60% from its 52-week high, the stock valuation has become increasingly more reasonable compared to the recent past, which could be an exciting opportunity considering Atlassian's position within its industry.

Is Atlassian's valuation still steep?

Atlassian currently trades at 16x sales, which is still considered high but much cheaper compared to its previous valuation. The primary reason that the stock trades at its current valuation is that the company is somewhat of a monopoly within the bug-and-issue tracking market. With an 82% market share, the company has a firm market position. It also has high levels of market share within other software product segments. Furthermore, the company is also competitively positioned to retain that market share. Their competitive advantages stem from both first-mover advantage and quality, combined with the reasonably priced product; Atlassian has managed to become a behemoth within its space.

Atlassian continues to see strong inflows, with total revenue coming in at $740 million for the quarter. The latest earnings witnessed a slight slowdown, with revenue growing 30%, which resulted in a sell-off. Regardless, Atlassian's future remains bright, and fourth-quarter revenue should come anywhere from 30-35%, which should calm some of the investor's nerves. Considering the broader economic environment, investors will continue to be worried about whether Atlassian can maintain its run rate.

Atlassian has predicted that its potential market size is close to 800 million so-called "knowledge workers, of which only 23 million are software developers and 100 million, are technical workers. These numbers could be embellished, but the overall addressable market for Atlassian remains very high. The total addressable market, for the software products it works with, is expected to be around $60 billion by 2025, up from $30 billion, leaving significant upside for Atlassian. In order for the valuation to continue to be justifiable retaining market share remains central.

Revenue continued to be aided in the quarter by Subscription and Cloud products, two areas which the company is currently focusing on to continue its strong run. Both grew by around 60% during the latest quarter, and Atlassian expects the segments to continue their high rate of growth going into the fourth quarter. Expect these segments to be the backbone, as we go into the fourth quarter to drive revenue.

Management's strategy moving forward

Management continues to re-iterate that it will be focusing on cloud migration, especially from data centers as it looks to streamline its operations. It has integrated Atlassian Analytics onto its platform, which it believes will help better coordination between teams, and in turn, help bring in incremental high-value customers. Atlassian analytics also is backed by Chartio, which it acquired in 2021. The combination of analytics and visuals of Chartio should help Atlassian further improve its position in the segment, as the analytical tools combined with the visuals help the company drive customers towards its products.

Management has also indicated plenty of opportunities for collaboration beyond software development teams. The company continues to develop products it believes can serve this broader demographic of customers. For the rest of the year, management expects cloud and subscription revenue to increase relative to last year, and this could help the stock stabilize moving forward.

Investing considerations and risks

Although continued reinvestment into the business continues to be critical for management, it will have to consider becoming profitable soon.

Atlassian continues to face headwinds as the global economy faces a slowdown. Rising interest rates may affect capital expenditure, and spending on third-party software may slow down. Beyond that, it will need to focus on becoming profitable. Free cash flow remains strong, coming in at $312 million, so there should be no issues with capitalization. Furthermore, personnel costs and investments in technology migration are expected to weigh down on gross margins. The migration toward the cloud could also affect the company's free cash flow. Both these factors could weigh negatively on investor sentiment.

Overall, Atlassian's business is not the issue, but whether the current environment and the broader implications of a tech correction are a more significant risk to the stock than the long-term potential. The company continues to execute and redirect its business as necessary, but questions remain about whether investors will remain committed to the stock.