Atlassian: Tech companies tipped to face more share market pain

Atlassian and other technology companies have already endured months of pain on the share market, but experts warn there is more to come.

Tech companies such as Australian-founded Atlassian are nursing deep wounds after months of pain on the sharemarket, and experts warn the damage could get worse before they bounce back.

Atlassian, founded by Aussies Mike Cannon-Brookes and Scott Farquhar, has had its share price tumble about 60 per cent since November amid a wider global tech-sector rout.

Like many tech companies the business software provider boomed during the work-from-home revolution in 2020 and 2021.

In November, the company’s Nasdaq-listed shares hit a record high price of $US483.13, valuing the Sydney-headquartered firm at more than $US100 billion.

But a worrying mix of inflation jitters, system outages, and disruptions from the Ukraine conflict has – as of this week – eroded Atlassian’s share price to a near 18-month low $US161.

The company is now worth about $US45 billion on paper, a fall of $US55 billion in six or so months.

The dive comes as the technology-heavy Nasdaq – and the consumer giants that occupy it – wallow in a bear market, with the US-based index currently down about 30 per cent from its November record high.

So how much worse could it get for Atlassian and the tech cohort?

According to Novus Capital senior client adviser Gary Glover, a lot.

“I think you’ll see a bit of a shock”

Mr Glover told NCA NewsWire inflation was a major factor, while another factor that has proven to “kill” growth stocks was higher interest rates.

Central banks around the globe have embarked on a steep hiking cycle in recent weeks to curb runaway inflation, something that is typically to businesses whose value is based on future potential.

Many tech start-ups borrow heavily to set themselves up, with any interest rate rise therefore a daunting prospect for investors.

“I think it’s got further to go,” Mr Gloverwarned of the rolling tech rout.

Mr Glover noted there was high inflation in the 1970s where big companies like Coca Cola and McDonald’s, which were relatively new at the time, had corrections of up to 70 per cent.

“No one fathoms that those sort of stocks, even the highest quality ones, can have those corrections,” he said.

Mr Glover said history had shown over and over again that it was always a possibility for big falls to hit the biggest names.

He also said there were a lot of similarities between the current selloff and the bursting of the dotcom bubble between 2000 and 2002, although he predicted it would not be as brutal.

“I think you’ll see a bit of a shock, but I think you could actually see quite a strong bounce as well out of this low here,” he said.

“There will be a bit more pain but I don’t think we’ve seen enough blood on the street yet.

“I haven’t seen the desperation that you normally see in a low.

“I don’t think it will be like 2000 where it took a long time to recover. I think this one could be a sharp recovery because this one’s got a rate cycle behind it.”

Tribeca Investment Partners portfolio manager Jun Bei Liu told NCA NewsWire the world was going through a transition phase where cheap money was no longer available.

“The interest rate is going higher at a rate where it’s faster than anyone’s expectations, so the US has put up their rates and even Australia,” she said.

“The cost of borrowing is much higher and it puts a lot of pressure on tech companies because their valuation is based off the discount rate, which is directly linked to the interest rate.

“The higher the interest rate, the lower the value, so that creates a bit of problem.”

Ms Liu said in general, many quality technology companies that generated cash flow had reached a very cheap valuation and represented a good buying opportunity.

“Investors do need to distinguish the ones that are actually profitable … for the ones that need to continue to use cheap capital to drive growth, these businesses will continue to struggle,” she said.

Unique hurdles

Atlassian shares are certainly not the only ones going through a rough patch.

Giants like Apple, Google, Facebook, Amazon, Microsoft and Netflix are all down in the US.

Afterpay, Xero and Wisetech Global are also down in Australia.

Ms Liu said in Atlassian’s case, it was a high growth business that required capital to grow.

“The world is a little bit different because the cost of capital is going up and the valuation may still be under a bit more pressure,” she said.

Aside from inflation, Atlassian has also had a number of unique hurdles.

The company recently endured an outage that affected its Jira, Confluence, Opsgenie, Statuspage, and Atlassian Access operations, which took weeks to finally sort out.

The war in Ukraine also forced the company to block sales into Russia and Belarus, and suspend licenses owned by the Russian government and businesses supporting the war effort.

There were some positives to take from the latest earnings report, but investors still appeared wary.

Revenue rose 30 per cent to $US740.5 million for the three months to March 31, but the company slipped to a $US31.1 million ($43.7 million) loss for the three months ended March 31.

This paled in comparison to a $US159.8 million profit in the same period last year.

The company did add three new products during the period, and it insisted the loss of nearly 2000 Russian-based accounts had not damaged customer growth.

All of this, of course, has run concurrently with Mr Cannon-Brookes’ foray into the energy sector, and his attempted takeover of AGL Energy.

Earlier this month, his private investment group Grok Ventures purchased an 11.28 per cent stake in the energy giant, becoming its largest shareholder.

His mission, he says, is to steer Australia’s biggest polluter towards a clean energy future instead of burning coal for what could be another two decades.

Australian Eagle Asset Management chief investment officer Sean Sequeira told NCA NewsWire the outlook for technology companies was usually “quite distant”, so when interest rates were low it presented a “relatively rosy picture”.

“As interest rates increase, the valuation on those future cash flows, but particularly the ones that are quite distant, are disproportionately lower relative to those new companies that are making near-term cash flows,” he said.

“So they end up getting hit a lot harder and with a lot more selling pressure as the interest rate outlook starts to increase.”

Mr Sequeira said the outlook for technology companies would be tied to the market’s perception of interest rate increases by global central banks.

“Where you think the end is will be determined by how much further the US will raise interest rates,” he said.

“Are they currently on top of inflation or are they still behind in terms of trying to catch the inflation tail?”

Mr Sequeira said he believed there would be continued volatility for some time.

“That volatility, we think, will continue over the next short while until the market gets a good handle on the Federal Reserve System actions,” he said.

“On top of that, the tech stock volatility will be accentuated even further than the general market.

“The pressure on long duration assets will continue for some time.”