1 Artificial Intelligence (AI) Stock Falls 64% to Buy on Decline, According to Wall Street

Atlasian (TEAM -5.65%) is the enterprise software company behind popular platforms like Jira and Confluence that help organizations increase productivity. Its shares are trading down 64% from their all-time high set during the 2021 tech frenzy, with a relatively expensive valuation combined with slowing revenue growth contributing to the decline.

However, Atlassian could unlock a new phase of growth thanks to artificial intelligence (AI), which has the potential to transform all of its products.

The Wall Street Journal tracks 27 analysts who cover Atlassian and reached a bullish consensus — none recommend selling. Should retail investors heed their optimism?

Atlassian is laser-focused on AI

Jira and Confluence are Atlassian’s flagship products. Jira was originally designed as a workflow tool to help software developers manage and deliver their projects, but it has become increasingly popular with non-technical teams who use it to collaborate to all types of work. Confluence is like a virtual workspace where employees from multiple departments can post information and discuss ideas.

Atlassian Intelligence is a suite of over 30 AI tools designed to enhance Jira and Confluence. It can be a powerful virtual assistant capable of identifying bugs and even software dependencies, which can save developers an untold amount of time. In addition, it is able to instantly generate and summarize texts on command, which is useful in Confluence.

The company said monthly active usage of Atlassian Intelligence tripled during the fourth quarter of fiscal 2024 (which ended June 30), compared to just three months prior.

Earlier this year, Atlassian launched a new AI product called Rovo, which it describes as an always-on teammate. It features a unique search tool that can pull data from across an entire organization, even beyond Atlassian applications, to provide the most accurate insights. It also serves as a chatbot that is able to hold conversations with employees about their work to help them complete their tasks.

Rovo is still in beta mode, but Atlassian says it will be priced separately from its other products at launch, creating a new revenue stream for the company.

Image source: Getty Images.

Solid growth driven by high-spending customers

Atlassian generated record revenue of $4.4 billion in fiscal 2024, up 23.3% from the previous year. While this was a robust growth rate, it was a slowdown from previous years; The company’s revenue of $3.5 billion in fiscal 2023 was up 26%, and its $2.8 billion in fiscal 2022 was up 34%. This slowing (but still strong) rate of revenue growth is a key reason why Atlassian’s stock price has fallen.

Customers can deploy their software in a few different ways. Many large organizations either use their own servers or those managed by major data center operators such as Microsoft and Amazon. However, it is simpler and more cost-effective for smaller customers to use Atlassian’s cloud servers.

As a result, cloud became Atlassian’s largest segment by revenue and grew 31% in the final quarter of fiscal 2024 — equal to the fastest pace of the year. As it becomes an even bigger part of Atlassian’s revenue base over time, it could help the company’s top-line growth reaccelerate.

Atlassian ended fiscal year 2024 with more than 300,000 customers. However, 524 of them spent at least $1 million annually on its software products, which was up 48% year over year. It’s a sign that larger, more complex organizations are finding value in the company’s productivity tools, and their spending could expand further as new AI software products like Rovo become mainstream.

Wall Street is bullish on Atlassian stock, but is it a buy?

The Wall Street Journal follows 27 analysts who cover Atlassian, and 13 have given it a buy rating. Another three are in the overweight (bullish) camp, while 11 recommend holding. No one recommends selling. Those analysts have an average price target of $207.84, 27% higher than where the stock is trading at the time of writing. So should investors buy it now?

Atlassian stock was trading at a price-to-sales (P/S) ratio of around 50 when it peaked in 2021, which was incredibly expensive. The combination of falling stock prices and rising earnings in the years since has pushed the P/S ratio down to 9.7. This is close to its cheapest level as a public company.

TEAM PS Ratio data by YCharts.

From that perspective, Atlassian stock looks like a good value. The company’s cloud segment could also support a higher share price as it will be a key growth driver and had a strong finish to fiscal 2024.

Additionally, Atlassian plans to double its total annual revenue to $10 billion over the long term, so its stock could look especially cheap to investors with a time horizon of at least five years.

Ultimately, AI will continue to be a big tailwind for Atlassian as it finds unique ways to apply the technology. Over time, the company is likely to launch several new AI products that could unlock new revenue streams that analysts aren’t even considering right now.

Therefore, given Atlassian’s current valuation, cloud growth and its long-term opportunities, I agree with Wall Street’s valuation. The stock could be a great buy for investors right now.