Why Atlassian is now one of the world’s most expensive tech stocks – Michmutters

Why Atlassian is now one of the world’s most expensive tech stocks

It reaches the $US763.7 million free cashflow figure by taking net cash provided by operating activities of $US883.5 million and subtracting capital expenditure on property and equipment of $US70.6 million, alongside payments of lease obligations of $US49.1 million.

As an unofficial accounting method, Atlassian’s free cashflow also excludes other relatively minor expenses booked through its cashflow statement such as investment purchases, purchases of intangible assets, interest paid, and payment of deferred consideration.

Still, it’s correct to say that Atlassian is positive cashflow and not really losing money.

Non-cash expenses

However, the lion’s share of the discrepancy between the accounting loss and free cashflow generation is explained by about $US1.1 billion in non-cash expenses.

Free cashflow excludes $US707.1 million in share-based payment expenses accrued over the year and $US434.3 million in writedowns to the fair value of debt for equity notes.

How investors should treat share-based compensation is a divisive topic.

For Atlassian, paying your staff $US707.1 million in shares to save on cash makes a hell of a lot of sense. It also works perfectly when the market ignores the dilution, as well-paid, aligned staff grow the business and investors bid the stock higher in response.

As the shares rise the company can issue them with less dilution and save more cash on salaries amid a battle to recruit the best tech talent.

However, this trick only works effectively on the assumption your shares maintain an upward trajectory over the long term.

In theory, if Atlassian faced competition and the share price tanked its staff may demand cash instead of shares meaning its free cashflow could turn negative.

It also has goodwill on its balance sheet of $US732.6 million making up about 22 per cent of total assets of $US3.4 billion. Excess goodwill is often a sign a company needs to write down the value of its acquisitions. It has taken advantage of its richly valued scrip to make at least 18 acquisitions including Trello for $US425 million, with amortization expense on acquired intangible assets also backed out of its free cashflow figure at $US32.4 million.

Over the financial year, it also repaid $US1.55 billion in debt in exchangeable senior notes and took on another $US1 billion of bank debt.

The operating cashflow of $US883.5 million and $US1 billion of new bank debt helping available cash to actually finish up $459.4 million for the year to $US1.4 billion.

So for tech investors, Atlassian ticks the boxes.

It’s founder-led, growing quickly, generates plenty of recurring sales on high software margins, and boasts a decent balance sheet. But the jury is out on valuation.

At $US268.59 it trades on 22.5 times annualized sales and 89 times Atlassian’s definition of free cashflow in financial 2022. This means today’s buyers must rely on very strong compound growth rates over the next decade to earn a return, with the market darling likely to remain volatile given its remuneration model.

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