The tech bear who predicted the fall of WeWork (WE), Carvana (CVNA) and Rivian (RIVN) says application software company Atlassian (TEAM) is at risk of declining to $0 per share.
David Trainer, CEO of New Constructs, a research firm powered by artificial intelligence, is best known for being skeptical of some of the hottest IPOs of the past few years. So when he puts out a bearish call on a name like Atlassian, it's bound to generate controversy.
Atlassian, which provides collaboration software and IT service management for enterprise customers, went public in 2015 at $21 a share, raising $462 million. Including debt, the offering valued Atlassian at $4.4 billion.
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Today, Atlassian has a market value of $34.7 billion – but fast-rising interest rates have punished shares severely in 2022.
Atlassian stock has lost more than 64% of its value so far this year, and Trainer says it has farther to fall – all because the era of ultra-low interest rates is over. The company is in big trouble due to its "heavy cash burn" and "limited cash reserves," Trainer says in a note to clients.
"Now that access to cheap money is gone, Atlassian will be challenged to further fund its cash-burning business," Trainer says. "The company has burned through $838 million in free cash flow, excluding acquisitions, since its fiscal first quarter of 2021."
The analyst notes that with only $1.8 billion of cash on the books as of Sept. 30, 2022, Atlassian can sustain its trailing 12-months burn rate for only another 23 months from the end of October 2022.
"In other words, Atlassian will need either a capital raise or a significant change in business operations to remain a going concern," Trainer adds.
But Atlassian says the analyst's argument has no merit whatsoever.
"We fundamentally disagree with New Constructs’ assertion that Atlassian is a zombie stock and that our business strategy will not yield continued growth," says Martin Lam, Atlassian's head of investor relations. "Atlassian continues to generate positive free cash flow as we have each quarter for the past seventeen years, while investing purposefully in creating long-term value for our customers."
Trainer further contends that the marketplace for Atlassian's products has fundamentally changed over the past few years. Workflow management software was once a greenfield opportunity, the analyst says, but such products have now become commonplace. As a result, Atlassian now faces "fierce competition from larger and more profitable companies."
Trainer says Notion and Zapier are two examples of well-funded competitors, which he describes as unicorns backed by patient venture capital.
"VC funds have historically been more comfortable with money-losing enterprises and willing to pursue a 'growth-at-all-costs' strategy," says Trainer. "The presence of VC-backed private competitors might continue to force Atlassian into a cash-burning race to the bottom."
To be sure, Trainer's view stands in stark contrast to what the rest of Wall Street thinks about Atlassian stock. Of the 25 analysts covering TEAM stock tracked by S&P Global Market Intelligence, 15 rate it at Strong Buy, two say Buy and eight have it at Hold. That works out to a consensus recommendation of Buy, with fairly high conviction.
Meanwhile, the Street's average price target of $199 gives Atlassian stock implied upside of 47% in the next 12 months or so.
Among the bulls, CFRA Research analyst John Freeman rates Atlassian stock at Strong Buy. Although the company reported disappointing fiscal first-quarter results in early November, "this earnings per share miss does not change our view of one of software's most competent, talented and strategically talented management teams," the analyst writes.
For the three months ended Sept. 30, Atlassian generated levered free cash flow – or the cash remaining after capital expenditures and financial commitments have been met – of $150.6 million. That's down from $272.2 million in the prior three-month period and well below the $299 million generated in the same quarter a year ago.
CFRA Research's Freeman notes that Atlassian reaffirmed its operating margin guidance when it posted quarterly results last month, "implying management now recognizes the prudence in cutting the pace of hiring."
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