No Longer TEAM Players: Morgan Stanley Downgrades Atlassian On Valuation

The bullish case for Australia-based Atlassian Corporation PLC TEAM, a provider of team collaboration and productivity software, is no longer warranted after the stock's approximate 100 percent gain since the start of 2018, according to Morgan Stanley.

The Analyst

Morgan Stanley's Keith Weiss downgraded Atlassian from Overweight to Equal-weight with a price target lifted from $75 to $94.

The Thesis

Atlassian's favorable outlook remains unchanged, Weiss said in the downgrade note. (See his track record here.) 

The analyst named the following reasons for a positive outlook:

• Durable 30-percent revenue growth.
• Sustainable 30-percent free cash flow compounded annual growth.
• 25-percent operating margins in five years and 30 percent in 10 years.

The Street has recognized Atlassian's growth prospects, and the company remains one of Morgan Stanley's "favorite long-term stories" in the software space, Weiss said. Yet the stock's valuation needs to take priority at this point after a triple-digit percentage return, he said. 

The multiple growth outlook implies management is building the company for the long-term, so any notable inflection in revenue growth or margins is not likely to be seen in the near-term, the analyst said.

The stock is trading within striking distance of Morgan Stanley's $94 price target, and the stock's multiple implies a 17 times 2019 EV/sales multiple and more than 50 times 2019 estimated EV/FCF, which suggests an "increasingly balanced" risk-reward profile, according to Morgan Stanley. 

Price Action

Atlassian shares were down 4.66 percent at $88.58 at the time of publication Thursday. 

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