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Here’s why I think Atlassian’s recent price slump is a buying opportunity

Atlassian Corporation Plc, the Sydney-based and US listed software company lost 14% of its value on Friday after the company reported its fiscal first quarter results.

Despite reporting Q1 revenue growth of 36.7% to $267 million for the quarter and similar growth expected in Q2, the market clearly felt that it was not enough to justify Atlassian’s current valuation.

After all, the company is currently trading at a price to sales multiple of 17 and at that valuation, anything less than stellar growth is likely to result in the share price being punished.

As a result, Atlassian shares are now down 27% from their 2018 high although but they are still up almost 50% from the beginning of the year.

So is Atlassian’s recent price slump a buying opportunity?

I certainly think so, particularly if you can hold for the long term and here’s why I think so:

  • Atlassian recently acquired OpsGenie, Inc. which has a large market opportunity. It’s their largest acquisition since they acquired Trello and it could provide significant upside.
  • The company’s shift to the cloud is putting short term pressure on gross margins and the market is focusing on that short term pressure. I think this is a necessary investment that will have long term benefits.
  • Atlassian has great products and is run by smart and visionary leaders. Ultimately, Atlassian is providing necessary solutions for workers and enterprises that complete most of their tasks in teams. That’s a large market and their recent decision to collaborate with, rather than compete with Slack Technologies for example, demonstrates that the management team is capable of making smart strategic decisions for the greater benefit of the company.

Risks

Whilst I’m confident about Atlassian’s long term performance, its valuation is quite high as previously mentioned. That puts it at risk along with other tech companies that have sold off in recent weeks.

Foolish Takeaway

I think Atlassian deserves a place in a well diversified and long term focused portfolio. I’m a fan of the products, its management and that’s why it’s a part of my own portfolio.

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Motley Fool contributor Kevin Gandiya owns shares of Atlassian.

You can find Kevin on Twitter @KevinGandiya.

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