1 Artificial Intelligence (AI) Stock Down 53% to Buy on the Dip, According to Wall Street

More than 300,000 enterprises around the world use Atlassian's (NASDAQ: TEAM) software to connect employees more effectively, streamline workflows, and boost productivity. The company is now enhancing those tools with artificial intelligence (AI), and it could lead to significant long-term growth.

The enthusiasm for this potential has helped Atlassian stock rise almost 24% over the past year. However, it still trades down 55% from its all-time high, which was set during the tech frenzy in 2021. That suggests there could still be plenty of room for upside.

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Wall Street thinks the recovery is likely to continue. The Wall Street Journal tracks 33 analysts who cover Atlassian stock, and the majority have assigned it the highest-possible buy rating, with not a single analyst recommending selling. Here's what investors should know before buying into the Street's optimism.

Image source: Getty Images.

Atlassian is making the big pivot toward AI

Jira and Confluence are two of Atlassian's flagship products. Jira is a project management platform that was originally designed for software development, but is now used across many non-technical departments within organizations, from marketing to finance. It helps employees track operational issues, assign workloads, and deliver finished products to customers.

Confluence is like a digital meeting place where employees can come together to share ideas and host documents, policies, and procedures.

Atlassian launched an AI platform called Rovo last year, which integrates seamlessly with Jira and Confluence but also third-party apps like Microsoft 365 (which includes Word, Excel, and PowerPoint). It includes features like Rovo Search, which helps employees instantly find information from across the entire organization no matter which app is storing it. Then there is Rovo Chat, which is a powerful virtual assistant that can answer almost any question about the organization's internal data and workflows.

But Rovo Agents might be the most interesting feature. Businesses can use it to develop their own custom AI-powered assistants to automate specific tasks across the apps they use each day, saving employees a significant amount of time. During Atlassian's fiscal 2025 third quarter (ended March 31), customers deployed Rovo Agents to automate tens of thousands of workflows in Jira and Confluence alone.

During the quarter, the company also introduced Collections, which bundle Rovo with other specific Atlassian software products to encourage broader adoption and higher customer spending over the long term. For example, there is the Teamwork Collection, which includes Jira and Confluence, and there is the Strategy Collection, which includes apps like Focus and Talent.

An Atlassian Collection is cheaper for customers compared to subscribing to each software product individually. However, by encouraging the customer to adopt the entire bundle, the company creates an opportunity to displace other tools from competing software providers, thus increasing its market share over time.

Atlassian is seeing decelerating revenue growth

Atlassian generated a record $1.35 billion in total revenue during its fiscal 2025 third quarter, which was a year-over-year increase of 14%. But despite the record result, that growth rate represented a significant deceleration from 30% in the year-ago quarter, and 21% in the fiscal 2025 second quarter three months earlier.

Atlassian breaks its total revenue into three categories:

1. Cloud: This revenue comes from selling versions of Jira, Confluence, and other software that Atlassian hosts in its own cloud data centers. This accounted for $880 million of the company's total Q3 revenue, and it was up by 25%.
2. Data Center: This revenue comes from selling software to organizations that use third-party clouds, like Amazon Web Services or Microsoft Azure. Revenue in this segment grew by just 7% in Q3, as Atlassian is trying to move these customers to its own cloud where it makes more money.
3. Marketplace: Atlassian takes a percentage of the third-party apps or extensions sold through its marketplace. These apps can enhance the company's existing software products. Revenue in this segment shrank by 5% in Q3, partly because of weaker demand than expected.

Despite the cloud segment's outperformance, its 25% growth also represented a slowdown from previous quarters. But there is some evidence that AI will drive renewed strength in the future. During Q3, Atlassian said sales of its Premium and Enterprise plans -- which are the only ones that include Rovo -- soared by 40%. Plus, the company said a record 1.5 million individuals within its customers' organizations are now using its AI products every month.

But building AI products isn't cheap. Atlassian's total operating expenses came in at $1.15 billion in Q3, an increase of $191 million from the year-ago quarter, led by a $109 million jump in research and development spending alone.

Since Atlassian's operating costs grew by 20% and its revenue only grew by 14%, it led to a net loss of $70.8 million at the bottom line. That was a negative swing from the $12.7 million profit it generated in the year-ago quarter.

Wall Street is bullish on Atlassian stock

The Wall Street Journal tracks 33 analysts who cover Atlassian stock, and 19 have given it the highest-possible buy rating. Five others are in the overweight (bullish) camp, while the remaining nine recommend holding. None recommend selling.

The analysts have an average price target of $279, implying the stock could climb by 37% over the next 12 to 18 months. But the Street-high target of $420 points to a potential upside of 106% instead.

Atlassian stock was overvalued when it peaked in 2021, with its price-to-sales (P/S) ratio reaching an unsustainable level of around 50. The 53% decline in the stock since then, combined with the company's consistent revenue growth, has pushed its P/S ratio down to a more reasonable level of 11.1, which is a discount to its three-year average of 13.6:

Data by YCharts.

In other words, Atlassian stock might be cheap right now. However, there could be some further weakness in the stock if the company's revenue growth continues to slow -- if more customers buy Collections, for example, that could be a headwind in the short term because bundled software sells at a lower price point. With that said, Atlassian values its addressable market at $67 billion, so it has barely scratched the surface of its opportunity based on its current revenue.

Moreover, management thinks the company could reach $10 billion in annual recurring revenue (ARR) by around 2029, which would be nearly double its annual revenue now. As a result, Atlassian stock could be a great buy for investors who can hold it for the long run, especially as the AI story unfolds.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Atlassian, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.