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Better Buy: Atlassian vs. ServiceNow

The Motley Fool
The Motley Fool
 2021-10-20
  • Atlassian’s loyal customer base could allow for strong product adoption in the future.
  • ServiceNow’s stellar financials are impressive by any metric.
  • One company’s size and future growth potential slightly beat out the other, making it the better buy today.

While many technology companies had a rough 2021 due to investors shifting away from technology stocks, some of these businesses are hoping to have a brighter rest of the year. Some players, in particular, are expected to report especially strong periods and hope to finish 2021 strong.

The team collaboration company Atlassian (NASDAQ:TEAM) and ServiceNow (NYSE:NOW), a company that is helping companies improve digital workflow, are projecting strong finishes to the year, but which company is a better buy for the long haul?

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Image source: Getty Images.

Atlassian's optionality

If you have ever worked on an online project with many team members, you might know how frustrating it can be to efficiently track progress, plan, and work with other members on the project. Atlassian is trying to make this process more efficient with its tools that "unleash the potential of every team."

Atlassian has landed big names like NASA and Airbnb (NASDAQ:ABNB) as customers, along with over 236,000 others. What is even more impressive is that those customers are very happy: Atlassian's net promoter score -- a score from -100 to 100 that is based on customer satisfaction, with a score of 70 being considered "world-class" -- is 75, with just 5% of customers saying they would not recommend Atlassian.

This stellar customer satisfaction has led to impressive financial performance. The company saw 30% revenue growth in its fourth-quarter -- which ended June 30, 2021 -- to $560 million while seeing its customers spending over $1 million grow 71% from the year-ago quarter, passing 175 customers. The company has been shifting to a cloud-based solution, and it has been successful -- migrating over 1000 users to the cloud in Q4, which grew 70% from the year-ago quarter.

Atlassian lost $213 million during the quarter, but it expects to be net income positive during the three months ending Sept. 30, 2021 -- reaching $0.09 to $0.10 per share in net income. While the company expected some volatility in revenue as it continues to migrate to the cloud, the company is expecting subscription revenue for the full year to grow in the mid-40% range while seeing its on-premise revenue streams tick down.

Atlassian's shift to the cloud opens up immense options for the business, specifically the ability to increase customer spending. With happy customers who are already incredibly loyal, any effort to create new products would likely be well-received, and the company's new subscription model allows its customers to adopt new products more easily than ever before. Even though it faces stiff competition, its position as a leader in Gartner's "Magic Quadrant" for enterprise agile planning tools, should provide some comfort to investors.

ServiceNow's impressive financials

ServiceNow is also trying to optimize efficiency, but in a slightly different manner. The company noticed that workflows can be slow across enterprises because employees in different departments often use different technology systems. ServiceNow is trying to streamline this process with its Now Platform to make enterprises more efficient. In the enterprise workflow space, ServiceNow is seen as a leader among stiff competition from companies like Ivanti and BMC.

Like Atlassian, ServiceNow has very happy customers -- its renewal rate is 97% and it has 1,200 customers spending over $1 million. The company grew its subscription revenue by 31% in second-quarter 2021 to $1.3 billion compared to the year-ago quarter, and it expects this to grow 5% sequentially to $1.4 billion in third-quarter 2021 -- representing 29% growth from the year-ago quarter.

The company was profitable in Q2 with a net income of $59 million, and its free cash flow was impressively high -- reaching $829 million so far in 2021 -- which represents a free cash flow margin of 30%. The only downside of the company's recent performance was its sales and marketing spend, which made up 42% of its subscription revenue.

The better buy? Atlassian

Despite ServiceNow's incredible free cash flow generation and profitability, the better buy today is Atlassian for two main reasons. First, the companies' growth rates are expected to move in opposite directions. ServiceNow's revenue growth rates have been slowing over the past five years, and while Atlassian's growth rates have been slowing as well, it is expected to increase as the company accomplishes its migration to the cloud. Unlike ServiceNow, its full-year and long-term revenue growth rates are higher than its current revenue growth.

Second, even though both companies are market leaders in their respective markets, and both are expected to capitalize on the digital transformation, Atlassian is 22% smaller than ServiceNow. Considering that both companies can capitalize on similar long-term factors, Atlassian seems to have a larger growth runway ahead. While both of these growth stocks could be deserving of a spot in your portfolio, I think that Atlassian slightly edges out ServiceNow as the better buy today.

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