“When you come out of a bear market like the one we’ve been on, what happens is there’s two types of companies you want to buy: the ones that have been beat up the most that are 70 per cent off in the post-Christmas sales – that’s not Atlassian – or the ones that have really good relative strength, which means they’ve gone down less than the overall sector, outperforming on the way down,” he said.
“In this scenario … you see the footprints of the existing shareholders of the stock who don’t want to sell, as well as the people on the margin who are waiting in the wings stepping in and buying a little bit as it’s on the way down.
“When the stock starts to recover, they shoot out of the box first because they’ve been going down the least and it’s like a coiled spring ready to take off.”
In October Atlassian’s shares fell 30 per cent to a low of about $67 before starting to rebound in late November.
But even with the 30 per cent fall from its September peak, the stock still fared better than many of the US tech giants. In the later part of last year, the blue-chip FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) collectively lost almost $US1 trillion from their 52-week highs.
Facebook and Netflix were the worst affected, suffering falls of about 40 per cent from their recent highs (both achieved in July). They are yet to recover.
Strong business model
Mr Davis, who has a buy rating on Mike Cannon-Brookes and Scott Farquhar’s Atlassian, said the company was in the same class of shares as companies such as Salesforce and cloud-computing business ServiceNow, both of which were also affected less by the tech rout.
“The FAANGs face business-model challenges. But no one is complaining about Atlassian’s business model, which is based on low-priced but high-quality collaborative software,” he said.
“Atlassian is almost like a Walmart in terms of having a super-low price but good value. Whereas with a company like Facebook [or Google], the issue has been that people didn’t realise they were monetising them.
“If you’re getting something for free, you have to understand that you are the product.”
Analysts surveyed on Bloomberg give Atlassian a 12-month average target price of $US91, just below its current price, while none of the analysts recommended selling the stock and 47.1 per cent gave it a buy rating.
On Monday in the US, Oppenheimer analyst Ittai Kidron reiterated his outperform recommendation and said in a note that the business had an “effective and differentiated go-to-market model”, which focussed on research and development over sales and marketing, as well as multiple growth drivers in the form of product advancement, growing its total addressable market and its annual price increases.
“We expect continued steady performance and believe Atlassian’s model can drive more upside in calendar year 2019,” he said.
On top of its sound business model, Mr Davis and Constellation Research vice-president and principal analyst Alan Lepofsky said Mr Cannon-Brookes and Mr Farquhar’s decision to abandon its communication tools Stride and Hipchat, in favour of partnering with competitor Slack, was the right call, giving them confidence in the company’s management team.
“This refocus of their efforts on their developer and more technical teams may not have been exactly what their users first wanted, but clearly investors are happy with the move, viewing it as a strategic way for Atlassian to focus on their core strengths and audience,” Mr Lepofsky said.
However, while most analysts are bullish on Atlassian’s potential, Stifel Nicolaus portfolio manager Chad Morganlander said his best advice to investors was to stay away from all high-growth tech stocks until the market settled, instead recommending “old-world” tech stocks such as Cisco, Microsoft and Oracle.
“We believe we’re in the early innings of this unstable market environment, so investors should lighten their load on high-data, high-momentum stocks,” he said.
“Even long-term investors need to be nimble and open-minded in this market environment.”