Why Atlassian Stock Fell 36% in February

Shares of Atlassian (NASDAQ: TEAM) continued to bear the brunt of the software sell-off last month as the collaboration-based software company disappointed the market with its fourth-quarter earnings report and fell alongside its software-as-a-service (SaaS) peers.

Investors are worried that new AI tools will disrupt companies like Atlassian by offering easier, customizable solutions for things like kanban boards, a Jira tool that is one of its most popular products.

Atlassian sells to mostly small and medium-sized businesses, which also makes it more vulnerable to new competition.

Atlassian finished the month down 36%, according to data from S&P Global Market Intelligence, continuing a long downward trend.

As the chart below shows, the stock fell steadily throughout the month, only to recover modestly late in February.

TEAM data by YCharts

Atlassian's troubles continue

Like most other SaaS stocks, Atlassian fell sharply last month as valuations compressed and fears about AI disruption led to a panic.

Atlassian may be more vulnerable, however, given its focus on small and medium-sized businesses and its lack of generally accepted accounting principles (GAAP) profits.

The biggest news out on Atlassian last month was its second-quarter earnings report. Even though the company beat estimates, the stock still fell.

Revenue in the quarter rose 23% to $1.59 billion, which beat estimates at $1.54 billion. Adjusted earnings per share increased from $0.96 to $1.22, which beat the consensus at $1.14.

However, Atlassian is still deeply unprofitable on a GAAP basis, with a $47.7 million operating loss in the quarter. Its adjusted profits have been inflated by $452.6 million in share-based compensation, or well over a third of its revenue.

That is a real cost to the company as it dilutes shareholders. Atlassian does repurchase its stock to offset that dilution, but because of the way financial statements work, those buybacks don't count against free cash flow or profits, even though they need to be done to keep dilution under control.

Investors may be losing patience with that cash management strategy, given the pressure on the software sector.

Image source: Getty Images.

Can Atlassian bounce back?

Atlassian called for full-year revenue growth of 22%, and said it would accelerate share buybacks to take advantage of its low stock price, which is still down more than 80% from its pandemic-era peak.

Still, it won't be easy for Atlassian to shake off the fears about the AI threat, especially as the company is on track to report a GAAP operating loss of roughly $300 million this year.

Atlassian may need to rein in its expenses, and that could mean layoffs at the company. Such a cost-cutting move could give the stock a boost and show management is taking the AI threat seriously.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Atlassian. The Motley Fool has a disclosure policy.