Why Atlassian stock fell 51% in the first half of 2022

The project management expert's stock chart in 2022 is not tightly related to the company's actual business results.

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Red arrow going down symbolising a falling share price.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Shares of Atlassian (NASDAQ: TEAM) fell 50.9% in the first half of 2022, according to data from S&P Global Market Intelligence. The Australia-based maker of project management and collaboration tools entered this period on a high note after gaining 217% in the previous two years, but that success made Atlassian's stock an easy target when market makers backed away from high-flying growth stocks.

So what

At the start of 2022, Atlassian shares changed hands at the lofty valuation of 117 times free cash flows and 40 times sales. Together with the aforementioned price gains in recent years, this rich valuation essentially painted a target on Atlassian's back. The stock was priced for perfection, and macroeconomic events were about to bring a lot more uncertainty and imperfection into the picture. 

The company did everything it could to support the expensive share prices. Atlassian crushed Wall Street's expectations across the board in January's and April's earnings reports, exceeding Wall Street's estimates by as much as 7% on the revenue line and 47% in terms of earnings. In the recently reported third quarter, top-line sales increased by 30% year over year as the number of paying customers rose by 25%. About 42% of third-quarter revenues was retained as free cash flows. Pick your favorite business metric and you'll probably find that Atlassian delivered robust results even in this challenging market environment.

But again, none of that mattered. Atlassian's shares were richly valued and ripe for a pullback. Macroeconomic concerns on a global scale provided plenty of inspiration for this correction.

Now what

The ironic part of this situation is that companies like Atlassian can help other businesses wring more business performance out of limited budgets. Hence, market slowdowns actually play right into this company's hands. Share prices are falling because Atlassian was seen as a risky investment in the spring of 2022. The reported results tell a very different story.

I agree that the stock still looks expensive today, trading at 64 times free cash flows and 19 times sales. However, that's a much more comfortable entry point than the even loftier valuation ratios seen six months ago. Shrewd investors might want to take advantage of this imbalance between winning business results and plunging stock prices. An Atlassian investment today should serve your portfolio well for years to come. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Atlassian. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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