3 Reasons Atlassian's Stock Is Up 30% in 2018

Shares of the cloud software company Atlassian (NASDAQ: TEAM) have climbed to new heights recently, rising over 30% in 2018 alone. Here's a closer look at what's propelling the stock price and how long-term investors should approach the cloud industry.

1. Frictionless scale in the sky

Growth can happen quickly in the cloud. A young company like Atlassian can capture new customers, onboard them rapidly, and cross-sell other products to them in much the same fashion that a $10 billion cloud company like Salesforce does. Barriers to entry are low, and it's much simpler to scale a product that lives in the cloud than a physical one.

As a result, Atlassian's sales continue to impress the market, growing at a 42.8% year-over-year clip for its second quarter of 2018. This builds on Atlassian's three-year average revenue growth of 42.3%, a rate that would see the company doubling in size every 1.7 years.

There's no doubt the company's stock is racing out of the starting blocks in 2018 because of a recent quarter that impressed the market. Notably, the company's subscription revenue stole the show, making up 45.6% of overall revenue and growing at a 71.8% clip. Subscriptions are a "sticky" business, which investors are particularly fond of.

2. The "what if" factor

There's an element of "what if" that Atlassian presents to Wall Street investors. It's related to the fact that the company is devoid of a sales force. This is unique among cloud companies -- or just about any other company, for that matter -- because how do you get the word out about your product?

For Atlassian, the sources are search, organic discovery, and good old-fashioned word of mouth and the company largely depends on self-onboarding to bring customers into the fold.

Atlassian management claims that (a) it is so product-focused that it attracts a new audience based on the merits of its software, and (b) it avoids deploying a traditional sales force because its entry-level products are affordable enough to escape budgetary approvals within its customers' IT departments.

But what if Atlassian did invest in a sales force? That's a question investors are wrestling with, and potentially why it's fetching a premium price-to-sales ratio.

A sales force would likely goose sales, but this could be a moot point. After all, investors have been posing the idea that Amazon.com could ramp up prices to increase profits for nearly two decades -- and yet we're still waiting on that one.

3. Expectations for the cloud are soaring

Another reason Atlassian's stock is surging is due to the market excitement around the cloud industry at large. Atlassian happens to be in the center of it all.

Consider the price-to-sales multiple so often cited as the most fitting valuation metric for cloud companies: At the moment, it stands at 8.3 across the industry. But the high flyers like Shopify, Atlassian, and Veeva are fetching a multiple roughly twice the industry average at 19.6, 16.3, and 16.4 respectively.

Rising expectations have propelled the industry higher. The average year-to-date return across 52 cloud companies is 19.5%, compared to the Nasdaq's 10% return over the same stretch.

There are many reasons for this, including generally strong earnings that enabled this niche industry to shrug off the market's downturn in February.

And the hype around the upcoming Dropbox IPO isn't hurting. That private cloud-storage provider filed its S-1 recently to list shares. In this filing, it cited Atlassian no less than four times as a comparable on the public market. The industry -- and particularly this company -- are very much in vogue at the moment.

The key takeaway for investors

Atlassian's stock -- like a bed of coals -- has been on fire lately. But the more apt comparison for the cloud industry at large is a bed of nails: It's unwise to put too much pressure on one point. It's similarly unwise to over-allocate to a single cloud company. Better to spread your bets across the industry.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Isaac Pino, CPA owns shares of Shopify. His clients may have positions in the stocks discussed. The Motley Fool owns shares of and recommends Amazon, Atlassian, Shopify, and Veeva Systems. The Motley Fool recommends Nasdaq and Salesforce.com. The Motley Fool has a disclosure policy.