Morningstar

Atlassian Earnings: AI Usage and Sunsetting Data Center Products Lead to Huge Quarter

We think Atlassian stock is significantly undervalued.

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Securities in This Article
Atlassian Corp Class A
(TEAM)

Key Morningstar Metrics for Atlassian

  • Fair Value Estimate
    : $220
  • Morningstar Rating
    : ★★★★★
  • Morningstar Economic Moat Rating
    : Narrow
  • Morningstar Uncertainty Rating
    : Very High

What We Thought of Atlassian’s Earnings

Atlassian TEAM reported third-quarter results that crushed guidance, with revenue up 32% year over year to $1.787 billion and non-GAAP operating margin of 31.7%, versus the high end of guidance at $1.697 billion and 27.5%, respectively.

Why it matters: Atlassian reported another strong quarter, including both headline numbers and underlying metrics. Revenue benefited from the sunsetting of its data center solutions, with some up-front revenue recognition, price increases, and the pull forward of some deals.

  • Cloud revenue grew 29% year over year to $1.132 billion, while data center grew 44% to $561 million and marketplace grew 7% to $94 million. Cloud and data center were meaningfully ahead of our estimates, while the marketplace was slightly light.
  • AI data points are clearly favorable and create a stark disconnect from the all-encompassing software selloff. AI credit usage is growing 20% month over month, which is impressive and should signal that Atlassian can still thrive in the AI era.

The bottom line: We maintain our fair value estimate at $220 per share for now for narrow-moat Atlassian. Considering the AI data points, quarterly results, good guidance, and accelerating buybacks, we see shares as attractive, especially given the software massacre in recent months.

  • Given the ongoing sunsetting countdown for the data center solutions, we are holding off on more meaningful model changes until next quarter, when management will likely provide initial guidance for fiscal 2027.

Coming up: Despite the pull-forward of some revenue, fourth-quarter guidance still came in slightly ahead of FactSet consensus estimates, which is impressive. Still, we fear a possible meaningful deceleration in fiscal 2027.

  • For the June quarter, the outlook includes total revenue of $1.657 billion and a non-GAAP operating margin of 30.5% at the midpoints. Given the company’s recent quarterly performance, we would be surprised if it did not beat the top end of the range again in June.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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