Atlassian has been on fire lately. In the past six months alone, the company’s stock price has rocketed 137%, reaching $180.19 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
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Why Does Atlassian Spark Debate?
Started by two Australian university friends who funded their startup with credit cards, Atlassian (NASDAQ:TEAM) provides software tools that help teams plan, track, collaborate, and share knowledge across organizations.
Two Positive Attributes:
1. Billings Surge, Boosting Cash On Hand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Atlassian’s billings punched in at $2.02 billion in Q2, and over the last four quarters, its year-on-year growth averaged 20.5%. This performance was impressive, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth. 
2. Elite Gross Margin Powers Best-In-Class Business Model
Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.
Atlassian’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an elite 85.6% gross margin over the last year. Said differently, roughly $85.64 was left to spend on selling, marketing, and R&D for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Atlassian has seen gross margins improve by 4.1 percentage points over the last 2 years, which is very good in the software space.
One Reason to Be Careful:
Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
Atlassian’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.
Final Judgment
Atlassian has huge potential even though it has some open questions, and with the recent rally, the stock trades at 6.1× forward price-to-sales (or $180.19 per share). Is now a good time to buy despite the apparent froth? See for yourself in our full research report, it’s free.
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