Why Atlassian Stock Popped on Wednesday

Atlassian (NASDAQ: TEAM) stock enjoyed a modest price bump of 1.7% through 11:30 a.m. ET Wednesday after earlier enjoying a more dramatic gain in premarket trading.

Why is Atlassian rising? Because yesterday, two separate investment banks published notes describing some pretty dramatic pricing power at the software stock.

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Citi and Barclays both love Atlassian

In separate notes on TheFly.com, first Barclays and then Citigroup pointed out that effective Feb. 11, Atlassian is raising prices on its Jira Service Management, Jira Software, and Confluence products. Prices will rise 23%, 24%, and 29%, respectively, says Barclays, while Citi estimates increases at between 23% and 24%. Both bankers agree that the price hikes will be significantly greater than the 5% to 15% increases Atlassian imposed in 2024.

Commenting on the moves, Citi calls the price hikes "aggressive," which could suggest that Atlassian is making a mistake -- but that's actually not what Citi means at all. To the contrary, Citi describes the price hikes as evidence Atlassian maintains robust pricing power over its rivals, implying the price hikes won't scare customers away and will instead just drop more money to Atlassian's bottom line.

Unsurprisingly in this context, both Barclays and Citi continue to recommend buying Atlassian shares, which Barclays thinks are worth $275 a share and Citi values at $255.

Is Atlassian stock a buy?

But here's the thing: Atlassian stock already costs more than $250. So even if Barclays is right, investors are looking at no more than a potential 10% profit from buying Atlassian stock today, while Citi's forecast implies no more than a 2% profit. That hardly seems like enough potential profit to justify a pair of buy ratings, especially on a stock that hasn't reported a GAAP profit since (checks notes on S&P Global Market Intelligence) 2016!

Granted, Atlassian does generate strong free cash flow of $1.3 billion annually. But on a $64 billion market cap, that works out to a price-to-free cash flow ratio of nearly 50. That's too rich for my blood, no matter what the analysts say.

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Citigroup is an advertising partner of Motley Fool Money. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Atlassian. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.