Is the drop in Atlassian stock a sneaky buying opportunity?

While the S&P 500 index set a new record last week, shares of the software giant Atlassian Society NASDAQ: TEAM they were recovering from a 15% decline. The driver of the collapse, coming after a nearly eighteen-month rally, was the company’s fiscal second-quarter results, released Thursday evening.

Considering Atlassian shares had benefited from the broad risk-on sentiment that has dominated stocks since November, gaining over 50% in the weeks since, expectations were obviously high that this report would knock it out of the park. Atlassian is still one of those tech companies whose shares skyrocketed during the pandemic but then plummeted as rates rose throughout 2022. But while many big names in tech have managed to undo all that damage, Atlassian is still in shooting mode.

Based on recent results, it appears that may be the case for some time. But for those of us on the sidelines, there’s reason to think that this dip could actually be a sneaky buying opportunity and that not all is as bad as it seems. But first let’s look at the numbers.

Strong front page numbers

As a rule, you always want to see a company beat analyst expectations for the key numbers in a report, namely earnings and revenue. Atlassian managed to do so, showing an impressive 21% year-over-year growth in the latter figure. Quarterly subscription revenue increased more than 30% over the year, helping drive overall revenue and gross profit to record levels.

Where things went wrong, however, was with the company’s forward guidance. Investors might forgive a miss if forward guidance is stronger than expected, but they rarely do the opposite. In Atlassian’s case, beating consensus on revenue and earnings wasn’t enough to make up for weak guidance, which scared investors to death. Stocks fell at the open on Friday and closed lower again last night.

However, this is still the same Atlassian that found itself at the top of Oppenheimer’s top picks for 2024 last month and that the teams at Citi and Wells Fargo announced a purchase less than two weeks ago. Despite the weaker-than-expected outlook, which is usually enough to justify a downgrade, Atlassian has had several heavyweights come out forcefully in its defense.

Jeffries analyst Brent Thill pointed to the company’s long-term growth trajectory as a reason to remain bullish, even in the face of the short-term warning. William Blair took a similar stance by reiterating the Outperform rating and acknowledging that some volatility was to be expected from the report, while remaining adamant that Atlassian’s upside potential remains intact. Even the renewed price targets, although lower than the pre-earnings level, suggest that the current decline is an overreaction.

Potential upside

UBS, for example, adjusted its price target up to $250, which indicates an upside of about 15% from the shares’ close on Monday. We’re inclined to be bullish and call this a rare buying opportunity in a stock that has been on the upswing since the final quarter of 2022.

Atlassian shares traded steadily in Tuesday’s pre-market session, and if they can end the day without being retested or falling below Friday’s low of $211, then things should get interesting. Technically, bears need to break above that level to confirm the end of the uptrend, but if they fail to do so quickly, then the argument that this is an overreaction, and therefore a buying opportunity, will quickly gain momentum.

The stock’s Relative Strength Index (RSI) has already dropped to around 30, and while it’s not officially in oversold territory (which is why it should be below 30), it’s not far off. You can’t help but think that the macro environment is too favorable to tech stocks right now for Atlassian to give up all of its hard-won gains over the past few months. Let’s see if stocks can continue to consolidate above last week’s lows, and if possible, get ready to back the truck.

Before you consider Atlassian, you’ll want to hear this.

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