Atlassian stock dropped 8% a day after it reported earnings, but Wall Street has 'no fear' about its future
- On Thursday, Atlassian's stock slid 8% after reporting a lower guidance for EPS next quarter than Wall Street expected on Wednesday.
- Analysts say the drop in stock is due to the impact of Atlassian's price increases and operational costs, such as hiring.
- Still, analysts are not worried, and they see long-term growth for Atlassian, especially in the IT industry.
A day after Atlassian reported earnings, its stock slid 8%, and analysts say it's because Atlassian is still feeling the after-effects of its price increase.
While Atlassian beat Wall Street's expectations on revenue and saw its revenue spike 38% from last year, its guidance for earnings per share next quarter was lower than Wall Street's expectations. The company forecast EPS of $0.16, while Wall Street was expecting $0.19.
Analysts drilled Atlassian's leadership team about the low guidance during the earnings conference call as the stock slid. However, some analysts say this is just a "blip," and that as Atlassian matures, it's natural that Atlassian's performance will vary from quarter to quarter.
"We are encouraged by the measures the company is taking to scale inside large customers and gain footholds in IT and we feel that their ability to make the right strategic choices will shine in the long-term," Joel Fishbein, Jr., managing director at BTIG, wrote in his note.
"Last quarter was perfect"
Pat Walravens, director of technology research and senior analyst at JMP Securities, which does business with Atlassian, says there are three main reasons for the stock's drop: the impact of its pricing changes, increased operating expenses, and investors' lofty growth expectations.
Atlassian announced price increases in October and many of its customers stocked up to get ahead of the price hikes. As a result, Atlassian had a strong end of the year but it will sell less in the next two quarters, analysts say.
"Last quarter was perfect," Walravens told Business Insider. "Generally, Atlassian's products are really good, and really cheap, and that's their secret sauce. That being said, they do raise prices every couple of years...If you're a savvy customer, which most of Atlassian's customers are, you stock up."
Analysts also say the low guidance is related to operations cost, such as product investments, increased hiring, and the AgileCraft acquisition. But for the most part, they're still optimistic about Atlassian.
"No company is bulletproof"
While Atlassian might incur high costs from hiring, it's a necessary step for a company to grow, Walravens says.
"Short term, that will hurt Atlassian stock price wise," Walravens said. "Longer term, you can't grow these businesses without adding employees, so the fact that they see lots of opportunity and they want to hire to address it is a positive."
In addition, analysts point to its recent moves in the IT operations space, with its acquisition of incident management company OpsGenie, as well as investing in Jira Desk, another IT product. This would position Atlassian to compete better against companies like ServiceNow.
On top of that, customers love Atlassian's products, says Richard Davis, managing director at Canaccord Genuity.
"Last week we spent 48 hours at Atlassian's customer conference and compared to other conferences, the interest, excitement and respect for Atlassian's products was easily in the top decile in terms of positivism," Davis wrote in his note.
With a combination of its growth in IT, customer loyalty, and its low-cost sales model, Davis says Atlassian will be in a "good place for several years to come."
"We have no fear that Atlassian's fundamental outlook has, or is about to, dim," Davis wrote in his note. "While no company is bulletproof, Atlassian comes about as close as any company we track."
That being said, Davis warns that this doesn't mean buying Atlassian stock poses no risks. If Atlassian raises its prices too much, competition could sneak in. But not all analysts have the same view -- back in February, Fishbein wrote that Atlassian could raise its prices with little to no customer complaints.