Over the past six months, Atlassian’s shares (currently trading at $220.40) have posted a disappointing 9.1% loss, well below the S&P 500’s 7.5% gain. This might have investors contemplating their next move.

Following the pullback, is now an opportune time to buy TEAM? Find out in our full research report, it’s free.

Why Are We Positive On TEAM?

Founded by Australian co-CEOs Mike Cannon-Brookes and Scott Farquhar in 2002, Atlassian (NASDAQ: TEAM) provides software as a service that makes it easier for large teams of software developers to manage projects, especially in software development.

1. Billings Growth Boosts Cash On Hand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Atlassian’s billings punched in at $1.53 billion in Q1, and over the last four quarters, its year-on-year growth averaged 14.7%. This performance was solid, indicating robust customer demand. The cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

2. Customer Acquisition Costs Are Recovered in Record Time

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Atlassian is extremely efficient at acquiring new customers, and its CAC payback period checked in at 6.1 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Atlassian more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Atlassian has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 29.6% over the last year. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Final Judgment

These are just a few reasons why Atlassian ranks highly on our list. After the recent drawdown, the stock trades at 9.9× forward price-to-sales (or $220.40 per share). Is now a good time to buy? See for yourself in our full research report, it’s free.

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