Atlassian is 20 years old and unprofitable — the market has its valuation all wrong, says Adam Schwab

atlassian-elon-musk

Atlassian founders Mike Cannon-Brookes and Scott Farquhar. Source: supplied.

Until a few months ago, no company had created more wealth for its shareholders than Sydney-grown Atlassian. At its peak in October 2021, the Nasdaq-listed business was valued $162 billion. At the time, Atlassian was one of the most valuable Australian companies that ever existed (behind only BHP and CBA, both of which are more than a century old). Atlassian was founded by two university graduates in 2002 using credit card debt.

Even more impressively, Atlassian was able to reach an incredible scale without ever raising money from venture capitalists to fund its early growth. It’s only investment round was from US-fund Accel, which bought shares off existing holders in 2010 before the company listed in the United States in 2015. That means Atlassian’s co-founders and co-CEOs, Mike Cannon-Brookes and Scott Farquhar, remarkably still own around 21% of the business each. For a brief period last year, they were the two richest people in Australia with a combined net worth of well over $70 billion (the duo have also made billions from a prescient investment in the US$55 billion Canva).

But as we’ve since discovered, markets often get it badly wrong and the tech sector has rapidly corrected, with high-profile stocks like Netflix (down 72%), Zoom (down 79%) and Meta (down 56%) hammered, as central banks slowly return interest rates to normal levels. Atlassian hasn’t been immune from the carnage, collapsing 55% from its bubble induced highs.

That drop however may be just the tip of the iceberg, with Atlassian still valued by the market at US$52 billion (75 billion), more than 11 times what the business was valued at when it went public in 2015.

In its most recent earnings report released in April, Atlassian announced that revenue for the past nine months grew from US$1.5 billion to US$2.04 billion ($2.95 billion) (or around 24%). Subscription revenue grew faster, but that was offset by losses in legacy businesses. Even with the near 60% share price calamity, Atlassian is trading on a multiple of more than 19 times sales. If you’re trying to work out what its price-earnings (or EV/EBITDA multiple) is good luck, Atlassian doesn’t make money these days, in fact, it loses money, lots of it.

This was perfectly acceptable in 2021, where investors’ bubble epoque ‘risk on’ stance led to them ignoring any sort of fundamental value analysis, now, not so much.

But Atlassian’s major problem isn’t only that it’s not profitable (Jeff Bezos showed lack of profitability over decades can be forgivable), but that its business is growing a lot more slowly than it used to and it now needs to spend a lot of money on marketing to achieve that growth. Atlassian was able to grow so quickly and profitably during its first decade of existence while famously spent almost nothing on marketing, instead relying on ‘product-led growth’. That is, CTOs and CPOs loved Atlassian’s revolutionary Jira product so much, it was able to grow virally and organically without the business having to spend millions of dollars on an enterprise sales team.

Atlassian’s prospectus noted that in 2015 the business grew by 48%, around double this year’s growth. Even more ominously, for a business that would regularly boast of not having a single salesperson, this year Atlassian is spending almost US$600 million ($866 million) on sales and marketing. Combined with employing more than 8000 people, this means that Atlassian is unprofitable, losing more than US$500 million ($722 million) for the first nine months of this year. Don’t forget, Atlassian isn’t a startup, it’s a 20-year old business. As a comparison, in 1995, 20 years after its founding, Microsoft generated US$6 billion in sales and made net income of $1.5 billion. After 20 years, Google was generating US$145 billion in sales and US$31 billion in net profit.

Atlassian has somehow become the Benjamin Button of the tech sector — profitable as a startup and loss making as it has matured.

While Atlassian will point to its positive operating cashflow as a proxy for EBITDA, Atlassian’s cash flows are positive only because it uses lots of equity to pay its employees.  It will pay more than US$700 million ($1 billion) to staff in share-based payments, that’s almost all operating cash flows.

workplace

Atlassian’s offices. Source: Atlassian.

This leads to an even bigger problem — and possibly explains Atlassian co-CEO, Scott Farquhar’s recent posturing on allowing workers to never have to come back to the office. Working for Atlassian has recently become a lot less lucrative. Most Atlassian employees who received equity in the last two years are likely to be underwater, that’s a massive pay cut for employees of a business that until a few months ago had probably minted more millionaires than any other Australian business. Atlassian’s HR team will also have a real problem recruiting and retaining staff given the ability to cash in on Atlassian’s ever-rising equity value is no longer reliable. (The market irrationally inflating Atlassian’s share price isn’t Atlassian’s fault of course, but it now has to deal with the very real impact).

To make matters worse, Atlassian’s legacy Jira product is clunky and has barely evolved in a decade — it’s essentially a ticket-based system which allows developers and product managers to communicate on tasks and is no longer loved by developers. Interestingly, Atlassian’s chief technology officer, Sri Viswanath, is departing the business. While it is still used by many tech businesses (including the author’s), it has no real network effect — that is, users can switch to a competitor product like Asana, Basecamp or Monday.com with minimal cost (other than the initial hassle of switching to a new system). This also explains why Atlassian has gone from boasting about not employing a single salesperson to spending almost US$600 million on sales and marketing.

In short, Atlassian is a two-decade old business with rising costs and an increasingly legacy product operating in a very competitive market. Despite that, it is still valued by the market at almost 20 times revenue. Given its slowing growth and lack of profitability and the increasing scepticism of tech investors generally, Atlassian could return to a more rational multiple of five times revenue, meaning it would be worth closer to US$10 billion than US$50 billion. Salesforce, another giant enterprise software business with a similar growth profile and profitability trades on a multiple of less than six times annual revenue (having a market value of US$185 billion on US$31 billion of sales).

If Atlassian was priced like Salesforce, Cannon-Brooke’s and Farquhar holdings would be worth around US$3 billion ($4.33 billion) each, which still would mean they are two of Australia’s most successful ever founders, albeit with a fraction of their former wealth.

Cannon-Brookes and Farquhar appear to agree the market got it wrong. The US market is far more accepting of founders selling equity and since 2016, the co-founders have shrewdly sold around 15 million shares each through planned sales. These sales are continuing in 2022 and so far, have netted Cannon-Brooks and Farquhar upwards of $2 billion each.

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Michael
Michael
1 month ago

The fundamentals of your analysis are not even close to being accurate.
Atlassian spends $600m a year on research and development, all going towards product quality and growth and still nothing on sales and marketing. You were only $600m wrong.
They choose to be not profitable with their eye on growth. As they have always done.

It’s not easy to change to a competitor as all the clients data needs to be transferred. The client would need a major reason to change. As the product is top of the market and inexpensive there is really no reason to change.

You could have shortened you article to three words.
” Buy the dip”

Rick
Rick
1 month ago
Reply to  Michael

Sell your stock before you lose it all

AreYouForRealLmao
AreYouForRealLmao
1 month ago
Reply to  Michael

600 million a year and they can’t make Jira not unbearably slow. Not sure that 600 is being put to good use. It literally can’t be being spent on “product quality”. You were only $600m wrong.

Paul
Paul
1 month ago
Reply to  Michael

For many developers, Jira is top of their “most-loathed” list. If Atlassian are spending that much on R&D, they are clearly wasting most of it. Confluence is another Atlassian product that is not much loved. I mean, how many products get a website like this one: https://ifuckinghatejira.com/

Mars
Mars
1 month ago
Reply to  Michael

LOL, you have a forward PE of 130, don’t be delusional

Pankaj
Pankaj
1 month ago
Reply to  Michael

Despite such expensive ($600 Mill) efforts for a Software company, the improvements are not even marginal. The speed of JIRA software has always been an issue, and slowly but steadily a crop of Productivity startups have mushroomed that chip at Atlassian’s Business yr after yr. If it were not the enterprise Atlassian would have sunk far deeper much earlier.

Last edited 1 month ago by Pankaj
F D
F D
1 month ago

Couldn’t agree more Schwabby! Unlike when we sparred over Eddy Groves about 15 years ago…

Michael
Michael
1 month ago
Reply to  F D

Opinions are worthless when you have facts.
This is poor quality fake news

Richard Allison
Richard Allison
1 month ago

Interesting analysis, but you got it wrong on the product perspective. Atlassian products features pretty well on Garter analysis, and knowing their products, a single one like JSM can become a serious competitor of Sales Force main product, and Atlassian has other 16 solutions. And I did not mention Jira intentionally, because this product, who according to you has not changed for a while, are competing with relatively new companies, while other products such JSM, has a lot potential to change and grow. All this, without needing a enterprise sales team, so add it on top of this potential. Atlassian suite has a lot of potental, and each product has a strong position on their field where competitors have sometimes their only solutions on that niche. And last, but not least, the entire suite is connect part of a big solution, no other company offer such a wide and mature solution.

Dennis Murphy
Dennis Murphy
1 month ago

Correct, even Microsoft is playing catchup and trying to copy a lot of their products.

Tony
Tony
1 month ago

Be aware that the two founders control 86% of the voting shares and any shares they sell lose the voting right. Second one of the CEO is busy on other things and not focused on the company. Thirdly remember if you call expenses R&D it doesn’t effect the bottom line. Plenty of companies in the past have done just that.
Very good review, thanks

Michael
Michael
1 month ago
Reply to  Tony

R&D is a company expense, of course it affects the bottom.

Finn Peacock
Finn Peacock
1 month ago

Anyone who thinks it’s a good strategy for a *software* company to be deliberately unprofitable after *20 years* should not be trusted with money.

Michael
Michael
1 month ago
Reply to  Finn Peacock

Well Finn, let me dull it down for you. Atlassian is signing up approximately 700 new customers every week. You have to spend money to make money.
Reinvesting profits back into the company is what a wise founder with a long term view would do.
Declaring a profit, paying tax on it and allowing it to leave the company is the short term view of the egotistical man on wages.

Rick
Rick
1 month ago
Reply to  Michael

400 customers is jack shit in terms of enterprise behemoths. This company is in no shape or form worth 45B USD

Stuart S
Stuart S
1 month ago

Expensing stock options is accounting gobbledygook. That is why non GAAP EBITDA is how most analyst value shares. Atlassian has healthy sales growth. I encourage the author and those who believe his analysis to short sell Atlassian.

Michael
Michael
1 month ago
Reply to  Stuart S

Well said Stewart.
Not to mention, 30% year on year revenue growth

Slavius
Slavius
1 month ago
Reply to  Michael

You mean 30% year on year product price increase? Without adding new features? That’s why I left this business after more than 10 years. Atlassian ruined every consulting company trying to sell their licenses together with some services by deliberately making Server products more expensive and feature lacking comapred to their cloud offering. That BTW did not deliver neither performancec nor security they claimed. Some customers were 3 weeks without access to their data. Their “No bullsh*t” and “Don’t f*ck with the customer” policies turned 180 degree…

Troy
Troy
1 month ago

Free cashflow has increased from a few million to $800m in that time. A good chunk of the negatives are due to Depreciation & share options.

Share options are a negative but given your value comes from net cashflows. Net free cashflow is growing at about 20% per annum. Your understanding appears to be limited on the fact that the majority of your costs in software are incurred upfront & depreciated & depreciated over the life of the product.

Last edited 1 month ago by Troy
See
See
1 month ago

Have you shorted and are trying to drive down the price?

Rick
Rick
1 month ago
Reply to  See

Don’t know about him, but I shorted some – JIRA is among the worst software mankind has ever created

Joe
Joe
1 month ago

What was right about this article is the fact that JIRA hasn’t evolved at all in 20 years and is very clunky compared to other browser based apps. Everyone groans when someone says “let’s use JIRA” to manage the project.

Alex
Alex
1 month ago
Reply to  Joe

I use “lets us Jira” much like “let’s go to McDonald’s for lunch” – as soon as you mention either you’ll get 10 suggestions that are better 😉

I am shorting Atlassian big time, you can’t have ptoducts that is generally so hated by customers and survive, their end is just inevitable

Nick
Nick
13 days ago
Reply to  Alex

Windows was one of the most hated products over the years and that company survived. When a product is big enough to generate hate its being used on a large scale.

Those who vocally hate it do so because it is used everywhere. They are also countered by a larger silent majority who don’t hate it and just get their work done. They may not love it to make shrines in praise, but they or their company do pay the money because it works. Business software is bought by businesses.

Steve
Steve
1 month ago

Sad to say, but Atlassian was never going to win at anything. They have shit products that devs hate

systembuilder
systembuilder
1 month ago

What i love about Jira is how it gives power-mad managers an ability to REFUSE to let you change the state of a ticket. Let’s say you thought you fixed a bug but it reappeared. Can you reopen the ticket you used to fix the bug originally and add more detail? Only if your manager is not a megalomaniac. What’s even much worse, each manager can have their own megalomaniacal state machine on how tickets can be handled. For example, dev group a, and dev group b, all processes the same, totally different jira state machines, different state names, different allowed transitions, different restrictions, which makes no sense at all. It’s a control-freak’s dream!

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