Atlassian vs. Microsoft: Which Enterprise Software Stock is a Better Choice?

Tech giant Microsoft Corporation (MSFT) is known for its broad portfolio of products and services, such as Microsoft Teams, Office 365 Security, and Xbox hardware. In addition, it provides cloud-based solutions. In comparison, Sydney, Australia-based Atlassian Corporation Plc (TEAM) designs, develops, licenses, and maintains various software products such as JIRA, a workflow management system.

Threats related to data security, especially on cloud-based platforms, continue to threaten the enterprise software market’s growth. Nevertheless, that market is still expected to grow exponentially in the coming months owing to increasing demand from almost every industry as part of digital transformation efforts and a continuation of widespread remote lifestyles. According to a Statista report, the worldwide enterprise software market is expected to grow at a 8.74% CAGR between 2021 - 2026. So, both MSFT and TEAM should benefit.

TEAM has gained 50.3% in price over the past three months, while MSFT has returned 13.4%. Also, TEAM’s 82.8% gains over the past six months are significantly higher than MSFT’s 27.8% returns. And in terms  of their past nine months’ performance, TEAM is the clear winner with 134.1% gains versus MSFT’s 46.9%.

Click here to check out our Software Industry Report for 2021

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

Morgan Stanley (MS) and MSFT announced a strategic cloud partnership on June 2 aimed at accelerating MS' digital transformation and shaping the future of innovation in the financial services industry. In addition to the cloud transformation, this partnership is expected to help MSFT broaden its product and services portfolio and create additional collaborative opportunities in the financial services industry focused on the modern workplace and  broader developer experience.

On July 29, Scott Farquhar, TEAM’s co-founder and co-CEO, said, “We are reimagining the future of work and are keen to seize the massive opportunities that we see across our three core markets: agile development; IT service management; and work management for all teams. We will continue to put in the hard yards to execute and advance on our mission to unleash the potential of every team.”

Recent Financial Results

MSFT’s revenue increased 19% year-over-year to $46.20 billion for its  fiscal fourth quarter, ended June 30, 2021. The company’s operating income grew 42% year-over-year to $19.10 billion, while its net income came in at $16.50 billion, representing a 47% year-over-year increase. Also, its EPS was  $2.17, up 49% year-over-year.

TEAM’s net revenue increased 30% year-over-year to $560 million for its fiscal fourth quarter, ended June 30, 2021. However, the company’s operating loss grew 127.3% year-over-year to $7.50 million. Its net loss came in at $213.10 million, compared to $385.20 million in the prior-year period. Also, its loss per share was  $0.85, compared to $1.56 in the year-ago period.

Past and Expected Financial Performance

MSFT’s revenue and total assets have grown at  CAGRs of 15.1% and 8.8%, respectively, over the past three years. Analysts expect MSFT’s revenue to increase 23.2% for the quarter ending September 30, 2021, and 14.2% in its fiscal year 2022. The company’s EPS is expected to grow 13.7% for the quarter ending September 30, 2021, and 14.7% in fiscal 2023. Furthermore,  its EPS is expected to grow at a 15.2% rate  per annum over the next five years.

In comparison,  TEAM’s revenue and total assets have grown at CAGRs of 33.3% and 6.7%, respectively, over the past three years. The company’s revenue is expected to increase 32.2% for the quarter ending September 30, 2021, and 21.5% in its fiscal year 2022. Its EPS is expected to grow 33.3% for the quarter ending September 30, 2021, and 31.1% in its fiscal year 2023. TEAM’s EPS is expected to grow at a 20% rate  per annum over the next five years.

Profitability

MSFT’s $168.09 billion trailing-12-month revenue is higher than TEAM’s $2.09 billion. MSFT is also more profitable, with a 41.59% EBIT margin  compared to TEAM’s 5.27%.

MSFT’s 13.76% and 20.58% respective ROA and ROTA compare with TEAM’s 2.01% and 5.24%.Valuation

In terms of forward non-GAAP P/E, TEAM is currently trading at 248.87x, which is significantly higher than MSFT’s 33.44x. Moreover, TEAM’s 165.27x forward EV/EBITDA ratio is higher than MSFT’s 23.73x.

So, MSFT is relatively affordable here.

POWR Ratings

MSFT has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast  TEAM has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Both MSFT and TEAM have a B grade for Quality. This is justified given MSFT and TEAM’s 24.59% and 22.18% respective trailing-12-month levered FCF margin , compared to the industry average of 12.58%.

MSFT also has a B grade for Sentiment, which is in sync with favorable analyst sentiment. On the other hand, TEAM has a C grade for Sentiment, consistent with average analyst sentiment.

MSFT has a B grade for Stability, while TEAM has a Stability grade of C.

Of the 146 stocks in the Software - Application industry, MSFT is ranked #14, while TEAM is ranked #61.

Beyond what I’ve stated above, we have also rated stocks for Stability, Momentum, Quality, and Value. Click here to view all the MSFT ratings. Also, get all the TEAM ratings here.

The Winner

Rapid digital transformation and increasing software applications are expected to drive the enterprise software market’s growth for an extended period. So, both MSFT and TEAM are expected to benefit. However, we think it is better to bet on MSFT now because of its superior financials, lower valuation, and higher profitability.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Software - Application industry here.

Click here to check out our Software Industry Report for 2021

MSFT shares were trading at $295.99 per share on Tuesday afternoon, up $1.69 (+0.57%). Year-to-date, MSFT has gained 33.95%, versus a 17.41% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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