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Stock Report – Atlassian and ServiceNow

Atlassian and ServiceNow: Unrolling the modern-day SaaS cloud ecosystem

If you were looking for two standout IT stocks across the last five years, Atlassian (TEAM) and ServiceNow (NOW) would surely be in the discussion. It’s perhaps no coincidence that the duo are what is now part of a rapidly growing sector, not only focusing on the cloud ecosystem but typifying ‘DevOps’ practices that allow rapid software development for IT operations.

 

Atlassian: University beginnings to Australia’s best tech success

Atlassian is a provider of productivity software for collaboration and project management. Founded in Sydney in 2002 by two uni colleagues, the company’s main product, Jira, was released that same year. It has since become a leading application for issue tracking and task administration.

A couple of years later, the business developed Confluence, a collaborative software platform designed for employees to share content and work together. At the end of 2015, Atlassian filed for a Nasdaq IPO, valuing the company at US$4.4bn. Since then its share price has soared, the business recently worth US$26.6bn with strong revenue growth coming off the back of global expansion, diverse acquisitions and over 135,000 customers.

 

ServiceNow: from a (humble) one-man show to a global powerhouse.

A producer of workflow management and enterprise cloud software, ServiceNow was founded in 2004 with a vision focusing on ways of working among enterprise workforces. The notion of cloud-based computing and software was still new, but little did anyone know the company would redefine enterprise software. ServiceNow’s model centres largely on SaaS (Software as a Service), including help desk functionality, tech support and other IT operations and management issues.

In 2012 the company listed on the NYSE with a valuation of US$2.2bn, reinvigorating life back into the IPO market. Now with over 8000 employees, ServiceNow commands a market cap of nearly US$50bn thanks to its tremendous organic growth, plus a series of complementary acquisitions that have broadened its enterprise software offering.

 

Each possessing a moat…and an envious growth story

It’s one thing for a business to grow into an established player, but if it takes control of its market and establishes an economic moat, that represents a strong investment thesis. Both companies have executed well on this point, all the while fulfilling lofty expectations built into the rising shares.

Underpinning the duo’s ascent is accelerating growth in customer numbers and revenue. Whereas many companies reach maturity and growth slows, the same cannot be said here. And most of all, this growth comes in addition to a high proportion of recurring business.

Atlassian recently reported 38% year-on-year revenue growth of US$309.3m, plus margins that edged higher. With another quarter of impressive growth expected – including sizeable free cash flow – the enormous momentum of the business is in play here. It’s also worth noting that among the company’s diverse customer base, no one customer accounts for more than 10% of revenue.

Similarly, ServiceNow grew revenue 33.9% year-on-year to US$788.9m, while its long-term EPS growth remains a remarkable 28%. There is a clear impetus for revenue to continue ascending at a rapid rate as NOW expands its workforce. Furthermore, growth prospects are supported by more than 5,400 enterprise customers – including 98% renewal rate – who are targeted with bundling of multiple products. High visibility into revenue comes courtesy of 700+ customers who contribute over US$1m in annualized contract value (ACV), as well as numerous governments clients.

 

Unfolding product portfolios that have yet to be realised

One of the major tailwinds for both companies is their ever-expanding portfolio of premier enterprise products. Given the trajectory with which enterprises will need to continue optimising their workflow to increase efficiency and minimise costs, there is a significant runway ahead. Analysts expect the ‘DevOps’ market to triple to US$24bn by 2023 as traditional software development approaches fail to keep up with the agility of a seamless and automated experience.

Investment towards innovation and development is another aspect which reinforces each company’s upside, shutting out potential competitors from gaining meaningful traction. Failing that, they can and have swooped on competitors to acquire complementary services and products. Atlassian has made its largest acquisition in years, securing OpsGenie – an incident management platform – and opening up a huge new growth channel.

In mentioning the ‘sticky’ revenue provided by enterprise customers earlier, there are high switching costs for employers to move to other products once staff depend on them every day. With the backing of these core products and services, which generate significant free cash flow, each business can afford to fund ‘blue sky’ early-stage initiatives, which presents high growth opportunities.

 

Management that has a vision and understands their market

What’s clear is that the management of Atlassian and ServiceNow both understand their market and have a vision to maintain their high growth profiles. They understand the importance of customer service and agility as large organisations.

In addition, their focus is evident. Whereas ServiceNow has dismissed speculation it may sell up, its intent is clear to become the next trillion-dollar giant. Atlassian is focusing on sustainable benefits rather than short term gross margins, also showing restraint in acknowledging defeat and partnering with Slack when it tried to compete with it in the team collaboration space.

 

An evolving path to ongoing success

While both businesses share a lot of similarities, none are more apparent than the opportunities that lie before them thanks to their ongoing product innovation, development and acquisition strategies. Each has set themselves up to access more markets and customers, yet consistently maintained a history of accelerating growth, even when integration has been required.

With the backing of significant recurring revenue that produces high levels of free cash flow, plus big clients including government branches, there is significant scope for each business to push ahead and extract value from its early-stage ventures. In turn, this has the promise of delivering major returns for investors into the future.

 

Capital 19 Rating and 12 Month Price Target

Atlassian (TEAM):

  • Current Price $130.28
  • Rating: Buy
  • 12 Month Price Target: $162.50

 

Service Now (NOW)

  • Current Price $270.60
  • Rating: Buy
  • 12 Month Price Target: $337.50

 


 

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