Atlassian (TEAM) stock is yet another large-cap tech name that benefited greatly from 2020’s pandemic-led tailwinds. The sudden shift to a largely remote office work environment meant a big boost in demand for the company’s workflow management software together with a surge in its stock price.
However, as focus now shifts towards the post-Covid recovery, investors are becoming less excited about buying TEAM stock.
Remote work trends continue to bode well for Atlassian, however, that doesn’t mean the stock will continue to perform well. As growth slows, a further reassessment of its valuation may be expected.
Despite a recent pullback from $262.40 per share down to around $200 per share, its forward price-to-earnings (P/E) multiple remains too high and as valuation concerns rise, investors could continue to bail out of TEAM stock sending it even lower.
More Declines Ahead For Atlassian Stock
As things begin to normalize post-pandemic, demand for the company’s JIRA, Confluence, and Trello collaboration platforms isn’t evaporating anytime soon.
Over the past few years, trends had already been moving in Atlassian’s direction with office life becoming increasingly remote. The forced work-from-home development due to the outbreak merely sped up the transformation.
That’s good news for the company’s underlying business, but it may not result in another boost for the TEAM stock price. Much of this upside is already captured at current valuations.
As a result, the risk of further contraction remains high and as growth starts to slow, and investors reassess tech valuations, further declines for TEAM may be expected. Even if valuation comes down to more reasonable levels, we could see another sell-off well into the double-digits.
Possible 37% Downside Risk From Current Prices
Admittedly, much of the downside risk with TEAM stock depends on the future price movements of tech stocks. However, assuming the sector can sustain its current frothy premium, with Atlassian currently sporting a forward P/E ratio of 153x, its current valuation still has plenty of room to fall.
For the current fiscal year ending June 2021, sales are expected to grow at around 30%. Yet, for FY22, ending June 2022, sales are only expected to climb 17%. Earnings between this fiscal year and the next are only projected to climb around 14% and slowing growth could mean further revaluation.
Even a modest adjustment could result in big losses for those buying TEAM stock today. Assuming valuation falls to 100x forward earnings based on its estimated earnings per share (EPS) of $1.39 in the coming year, that would imply a stock price of $139 per share. In other words, around 37% downside from today’s prices.
What Analysts Are Saying About TEAM Stock
According to TipRanks, TEAM stock comes in as a Strong Buy based on 12 Buys and 4 Holds. The average analyst price target of $270.85 per share implies around 22% upside potential from current prices. Analyst price targets range from a low of $235 per share to a high of $350 per share. (See Atlassian stock analysis on TipRanks)
Bottom Line: Risk Vastly Exceeds Potential Gains
Trends continue to move in Atlassian’s favor. Social distancing may be on its way out, but an increasingly remote office work environment is anticipated. While that’s good news for Atlassian’s portfolio of collaboration software platforms, it’s hardly a guarantee that further upside remains for its stock price.
Current valuations more than reflect its still-solid prospects, but a possible contraction in its forward multiple could result in heavy losses.
As investors weigh high downside risk against the minimal potential for gains, lower prices may be expected for TEAM stock going forward.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
