- The recent Atlassian IPO is the last major tech IPO of 2015.
- Investors rewarded the company for its impressive growth and profitability.
- This indicates that in 2016, investors will look for net income, together with top-line growth.
- Tech unicorns will be more selective while going for an IPO in this environment.
After a tough year for tech unicorn IPOs, the last major tech IPO for 2015 took place last week when Australian software developer, Atlassian (NASDAQ: TEAM) went public in a very successful debut. The company initially priced its offering at $17.5 (mid-point of range), which reflected a market capitalization of $3.6B; later, it upped its price range to $19.5, which reflected a $4B valuation and, finally, as shown in the chart below, it opened at $27.67, which represents an amazing $5.8B valuation – more than $2B above the initial valuation.
After the recent disappointing debuts of other unicorns like Square (NYSE:SQ), PURE STORAGE (NYSE:PSTG) and Box (NYSE:BOX), Atlassian's case is impressively different. What was the difference? In recent years, investors got used to seeing high-growth tech companies going public or raising funds in the private market, based on great growth potential, with very little appeal on the financials side, especially when it’s an early-stage or exploratory business that could generate significant top line and bottom line figures that take years of hard work. However, when it’s a business that has been around for several years and is still far away from breaking even, it will face a very difficult time in gaining investor confidence in the public equity market.
Unlike the previous examples, Atlassian is not only rapidly growing its top line figures at a 46% 3-years CAGR, but it also has positive operating and net margins. In times when the public equity markets are stumbling upon commodities weakness, currency devaluations, and rate changes, investors are looking for long-term stability, and they become very sensitive to companies’ profitability. In the current state of the markets, Atlassian's impressive top line growth and positive bottom line distinguish it from much other technology and enterprise software companies.
Atlassian develops collaboration software tools that enable workers and teams to organize, discuss, and complete their work deliverables. The company’s leading products are the projected planning tool JIRA, the document collaboration tool Confluence, the corporate chat app HipChat, and the code collaboration tool Bitbucket. As shown in the chart below, Atlassian increased its customer base rapidly in the last 13 years, and currently, the company has more than 51K customers worldwide. Atlassian customers include some of the biggest companies in the world like Visa (NYSE:V), Tesla (NASDAQ:TSLA), Samsung Electronics (OTC:SSNLF), Siemens Aktiengesellschaft (OTC:SIEGY), UBS Group AG (NYSE:UBS), etc.
Source: Atlassian F-1
Atlassian generates revenues in four segments: Subscriptions, Perpetual Licenses, Maintenance, and Other. Subscription revenues include fees from selling subscription-based licenses to cloud based or on-premise tools. Perpetual License revenues include fees from selling perpetual licenses to new customers while revenues from update fees, enhancements, and product support are included in the Maintenance segment. The other segment includes mainly fees from selling third-party add-ons and extensions in the Atlassian Marketplace.
As shown in the chart below, most of Atlassian’s revenues are generated by the Maintenance segment, which has grown at a 38% yearly rate. Total revenues have increased at an annual rate of 47%; the Other segment is the fastest growing segment, though, with an amazing 133% annual growth rate.
The impressive top line and segment growth are supported by heavy investments in product development and sales and marketing that aim to strengthen the Atlassian current revenue stream and generate new ones. Even though Atlassian has maintained double-digit YoY growth in investment, the company still sports a positive operating income. However, to compete with other solutions from leaders like Alphabet Inc-C (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), and IBM (NYSE:IBM), Atlassian will have to increase its investment level and might have to compromise on its operating margins as well as its bottom line growth.
Atlassian is currently trading at an unbelievable PE ratio of 687 and PS multiple of 16 P/S while other companies in this segment trade at more reasonable valuations. Atlassian's continuous growth while keeping a positive bottom line shows that the company is working within its limitations, and unlike many tech companies, Atlassian topline growth has not impacted its bottom line so far. The historical execution alongside the financial stability makes Atlassian a very interesting buy for the long term as investors are looking for stability and defensive investments. For now, investors should add Atlassian to their watch list until clear, definitive, and precise catalysts are formed for a long position.
If there is something we can conclude from the recent tech IPOs towards 2016 it is that investors are looking for growth and profitability. Bringing an impressive growth story to the market will not be enough as we saw in the case of Square IPO. This might narrow down the unicorn IPO list of 2016.