Growth is slowing and AI expenses have gone up.
Shares of enterprise software company Atlassian (TEAM -15.23%) plunged on Friday after the company reported financial results for its fiscal fourth quarter of 2024, ended June 30. As of 11:30 a.m. ET, Atlassian stock was down 16% and had hit new 52-week lows.
Here are some of the problems
For Atlassian, investors are concerned about both the Q4 numbers and the financial guidance for its fiscal 2025. Management had guided for Q4 revenue of $1.135 billion at most. It wound up generating revenue of $1.132 billion, which was inside of its guidance. But its growth did come at a cost.
Enterprises are demanding more capabilities powered by artificial intelligence (AI) than ever before. Atlassian can provide those but there’s a cost to developing relevant offerings. In Q4, the company’s revenue was up 20% year over year. But research and development expenses were up 24%, driven by investments in AI.
Atlassian’s management expects this to continue in its fiscal 2025. On an adjusted basis, the company’s operating margin is expected to improve to 21.5%, up from 20% in fiscal 2024. But its non-adjusted margin is supposed to be stagnant at negative 6%. Investors had hoped for better operating leverage with time.
What should investors do now?
The other thing to keep in mind here is that Atlassian expects revenue growth of only 16% in fiscal 2025 — a sharp slowdown from its 23% growth in fiscal 2024. In short, for Atlassian and other similar companies, AI is in demand and boosts expenses. But it’s not necessarily a growth booster because all of Atlassian’s competitors are developing their own AI services as well.
Even after today’s drop, Atlassian stock trades at 9 times its trailing sales. That may be a little steep for a company with slowing growth. But investors should keep their eyes on it nonetheless because it’s one of the largest players in the enterprise productivity space and it could be a stock worth buying at an appropriate price.
Jon Quast 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.
