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Friday, 11 December 2015

Atlassian -- Darling or Dud?

A local IT company Atlassian (founded by a couple of UNSW classmates who now find themselves in the top 20 richest Australians list) is a market darling, having seen the share price surge 32% after the IPO started trading. However, despite wishing the company well (Australia certainly could do with some more examples of successful high-tech companies), I have doubts about its success in the long term. At the current price, the company is 'valued' at around $8b, despite only having revenue of around $200m in 2014 (despite the 2014 revenue, up 44%, being trumpeted in a press release on Sep 10 2014, this years figures aren't announced yet -- not wanted to dampen the IPO party?). Also, while being in the enviable position of actually making a profit (albeit only about $7m!) for several years, it still reminds of the speculative bubble companies of the dot.com era at the start of this century, that relied on p/r rations instead of p/e ratios to justify their stock prices. While this worked out well for investors in Google, Amazon, and Apple, it certainly wasn't the case for investors in most of the 'dot.com' era IT start-up companies.

I'll have to check my CityIndex CFD trading account tonight and see if Atlassian shares are available as a CFD -- I'm tempted to keep a close eye on the share price and be ready to short-sell Atlassian at the first hint that their bubble might burst. While the revenue chart for Atlassian currently has the exponential appearance of the SaaS market in general, indefinite exponential growth is next-to-impossible, and a reversion to an S-shaped curve (if not a boom-and-bust trajectory) is much more likely. If one assumes revenue merely quadrupled from 2014 levels (to $1b pa) before levelling off, and if one also assumed that all revenue beyond $200m was profit (ie. around $800m pa profit), that would justify current pricing and a market valuation of $8b with a modest (for an IT growth company) pe of 10. However, if costs (for R&D etc) continue to grow in line with revenue (as has been the case so far), it is hard to justify the current share price if profits are only ever in the tens of millions range. And if revenues plateau (or drop off)...

However, I won't be placing a huge bet on Atlassian either way (maybe just a few hundred dollars for fun), as my track record for making judgments about the potential of individual stocks (and IT stocks in particular) is exceptionally poor. I recall ignoring the float of Microsoft in the early 80s as it seemed overpriced already in the IPO, I bought CSL shortly after it floated and then sold it again when I'd quadrupled my investment -- only to see it increase another 25x since I sold out, and I still smart at the memory of 'investing' a couple of thousand dollars in GEN (Global Entrepreneurs Network) unlisted shares in the 1990s, only to see them go out of business before even getting to the IPO stage (if their attempt to raise even more cash from their investors had succeeded they might have hung around long enough to benefit from the dot.com madness).

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