Atlassian is one of the last old-fashioned software companies - and Wall Street loves it for now

Wall Street's in love with Atlassian, the Australian software maker that's considered the most successful tech IPO of the year.

Its stock jumped 32% on the first day of trading Thursday, giving it a market cap of $5.7 billion. That's nearly $2.5 billion more than its last private market valuation, a rare feat in today's weak tech IPO market.

A lot of things that make Atlassian stand out from the rest of the pack: it's been profitable for the past 10 years, and has been able to grow without taking any direct VC investment or employing any large salesforce.

But one of the biggest differences from other red-hot software companies is the fact that Atlassian's business is still deeply rooted in the old, on-premise licensing model, in which users install the software in their own servers, as opposed to the "cloud," or software delivered over the web.

Cloud, schmoud

At a time when on-premise software is considered a dying breed, Atlassian's successful IPO shows public market investors are still willing to bet on companies with an old business model, as long as it shows growth and has a strong product.

"The interesting part is that the market didn't penalize them for not having mostly subscription revenue," Jason Lemkin, one of the most prominent investors in the cloud space, told Business Insider. "What it proves is that there is no one perfect model. The market wants great software companies first."

Lemkin may have a point. While most of the popular "unicorn" startups are all-cloud based, only a few of them have been able to go public so far. Even the ones that did IPO saw their stock get hammered in the public markets, as seen with Box and HortonWorks.

Atlassian gets nearly 73% of its sales from on-premise software, with maintenance fees accounting for more than half of the total revenue. Although its cloud subscription revenue is growing fast, now 27% of the total, Atlassian's on-premise maintenence and perpetual license revenue each increased over 90% and 74%, respectively, in the past two years.

Why the old way is so great for business

There's a reason traditional software is such a great business - a reason that companies like Microsoft and Oracle discovered decades ago.

With software, the cost of developing the product is all up front. Once you've covered that cost, every additional sale is almost pure profit. Sales, marketing, and distribution add to the final costs, but the incremental cost of production for each unit is extremely low, and stays low even as you scale to thousands or millions of customers.

Cloud software is different. The more your customers use it, the more you have to pay in terms of hosting costs, bandwidth costs, and so on.

Atlassian does see its customers eventually converting to the cloud, as it noted in its prospectus, "We believe that over time more customers will move to the cloud offering, and the cloud offering will become more central to our distribution model."

Lemkin stressed that Atlassian's move to the cloud is only natural, noting the top performing software companies are all-cloud based, like Salesforce, Workday, and Adobe. But it won't happen immediately.

"License and maintenance fees aren't going away overnight," Lemkin added. "I do expect over time, the majority of their revenue to become recurring and cloud. Everything is. But as a company founded in 2002, it's just riding the transition here and riding it well."

Potential huge risk factor

But some investors believe Atlassian's lack of cloud revenue is a huge risk and could end up stalling its growth in the future.

Moving customers to the cloud means Atlassian will have to cannibalize the largest part of its business, and there's no guarantee those customers will conitnue using Atlassian. Some of its biggest competitors are Slack and GitHub, which are growing fast.

Plus, cloud software contracts are typically smaller in the beginning, and revenue gets recognized over time, as opposed to on-premise software that gets recorded entirely upfront. That means its growth could appear to slow suddenly - a big red flag for investors.

If Atlassian wants to target the truly large enterprise customers, who typically sign the biggest contracts, it will eventually have to hire a big salesforce, which will cut into its operating costs.

"They will have a tough time seamlessly migrating customers to the cloud both functionally and financially," said Josh Burwick, a former Goldman Sachs analysts who's now running his own VC firm, Sandhill East Ventures.

Atlassian seems to be aware of this problem, too. It writes in its prospectus, "As more customers elect our cloud offering as opposed to our on-premises offerings, revenues from such customers is typically lower in the initial year, which may impact our near-term revenue growth rates. If our cloud offering does not develop as quickly as we expect, or if we are unable to continue to scale our systems to meet the requirements of a successful large, cloud offering, our business may be harmed."

But Lemkin believes this is all part of the transition process, and as long as Atlassian plays it right, he thinks Wall Street will continue to support it.

"If the conversion to the cloud hurts their growth temporarily -- as it did to Adobe, Intuit, and others -- as long as they manage Wall Street carefully, they should be fine," he said.