Growth concerns and a departing CEO were bad news for the software stock.
Shares of Atlassian (TEAM -3.04%) fell 11.7% last month, according to data from S&P Global Market Intelligence. The stock dropped rapidly after its quarterly earnings report. Investors raised concerns about future growth potential, and the departure of a key executive contributed to the sentiment.
Quarterly results looked good at first glance
Atlassian reported 30% revenue growth, with 41% expansion of subscription revenue. This translated to an impressive 59% free cash flow growth, reaching an all-time high of $555 million for the quarter.
These figures crushed analyst expectations — the company’s adjusted earnings per share (EPS) was roughly 20% higher than the Wall Street consensus. That’s often good enough to send a stock higher, but investors were focused elsewhere in the report.
Image source: Getty Images.
Investors are worried about sustainable growth
Despite Atlassian’s strong headline figures, the stock still slumped immediately following earnings. Analysts weren’t thrilled with the quarterly report, citing concerns about the company’s ability to maintain a high growth rate in its cloud segment.
The impressive quarterly results were largely due to the company’s data center segment, which won’t be sustainable in the future. Atlassian’s guidance indicates 25%-30% growth in the cloud segment, so it anticipates a slow-down. Those services represent roughly 60% of the company’s total revenue, and cloud is the focal point of future growth plans, so this is worrisome.
The stock’s expensive valuation doesn’t leave room for any uncertainty around growth.
A change at the top
Atlassian also announced a departure from its executive leadership team. Co-founder and co-CEO Scott Farquhar is stepping down after 23 years with the company. The company’s success to date is a testament to the quality of its executive team, and the transition of power can be a sensitive process. The company is entering uncharted territory, so this development brings inherent uncertainty.
Farquhar’s departure can’t be viewed positively, but it’s important to maintain perspective here. Atlassian’s other co-CEO is still in place, and Farquhar will keep his position on the board of directors. As far as executive shake-ups go, this one is relatively minor.
Atlassian’s April drop looks like a reaction to uncertainty and expensive valuation ratios. The stock’s forward price-to-earnings (P/E) ratio is over 55, and its price-to-sales ratio is over 11.
TEAM PE Ratio (Forward) data by YCharts. PE = price-to-earnings.
Before falling in late April, the stock was materially more expensive relative to earnings and cash flow. Its valuation ratios aren’t prohibitively expensive, but the news made it a bit harder for investors to take a leap of faith.
Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Atlassian. The Motley Fool has a disclosure policy.