Atlassian Delivers Cloud Strength; FVE up to $428

We are raising our fair value estimate to $428 per share from $405 for narrow-moat Atlassian based on strong second-quarter results and guidance. In light of the three month sell-off in software stocks, we see shares as undervalued even after the 10% pop in after-hours trading. Atlassian brought home a strong quarter in all facets, including upside compared with our revenue and profitability expectations, and notably around cloud revenue and new customer additions. Management also provided similarly strong guidance for revenue, while its outlook for non-IFRS operating margin came up short relative to our model. In addition, the firm's cloud migration is progressing very well. While the more rapid model transition is pressuring margins near-term, we remain bullish on Atlassian's ability to deliver margin improvements over time while still pushing revenue higher. Jira Service Management solutions were notably strong and remain a critical driver of growth in both traditional IT help desk and noncore service management applications. We view robust second-quarter results as reinforcing our view that Atlassian offers a broad set of easy to purchase, deploy, and use IT tools that can help customers innovate and cut costs.