Atlassian Has $1.3 Billion in Free Cash Flow — So Why Only 5/9 on Buffett's Scorecard?

What Is Atlassian?

Atlassian Corporation is the Australian-founded software company behind Jira, Confluence, Trello, and a growing suite of collaboration and DevOps tools used by more than 300,000 organizations worldwide. If your engineering team tracks bugs, your project managers coordinate sprints, or your company documents processes in a shared wiki, there's a meaningful chance that Atlassian infrastructure is involved.

The business is built on a land-and-expand model with unusually powerful network effects: Atlassian software is adopted at the team level, then grows organically through an organization as adoption spreads. Historically, the company grew almost entirely without a direct sales force — a distinction that made it an anomaly in enterprise software and kept its sales and marketing costs structurally lower than peers. As it moves upmarket toward larger enterprise accounts, that model is evolving, but the underlying stickiness of the product remains intact. Net Revenue Retention has stayed above 120% for three consecutive quarters, meaning existing customers are spending significantly more each year.

Revenue for fiscal year 2025 came in at $5.22 billion, up roughly 20% year over year, with cloud revenue crossing the $1 billion quarterly threshold for the first time. The company is in the middle of a multi-year migration from its legacy on-premises products to cloud subscriptions — a transition that creates near-term revenue lumpiness but builds a more durable, recurring revenue stream for the long run. Remaining Performance Obligations (RPO), a forward-looking indicator of contracted future revenue, grew 44% year over year to $3.8 billion, suggesting the growth pipeline is expanding faster than reported revenue.

How Atlassian Scores on All 9 Buffettology Criteria

Atlassian earns a 5 out of 9 on the Buffettology framework. That's a meaningful result for a company in the middle of a major business model transition — the passes reflect a durable, cash-generative business, while the failures highlight why GAAP profitability still matters under Buffett's lens.

1. High Return on Equity — FAIL

Buffettology requires sustained ROE above 12%. Atlassian's ROE is currently negative, because the company is reporting GAAP net losses: net income came in at approximately -$189 million on a trailing basis. Heavy stock-based compensation and the ongoing investment in cloud infrastructure and AI capabilities suppress reported earnings well below what free cash flow would suggest. Until GAAP profitability is achieved and sustained, this criterion fails by definition.

2. High Return on Invested Capital — FAIL

ROIC above 9% requires positive returns on the capital the company has deployed across debt and equity. With a -2.25% GAAP operating margin, Atlassian cannot clear this bar. Like ROE, this metric is a function of reported earnings — and until the GAAP income statement catches up with free cash flow reality, ROIC will remain negative. The underlying economics of the business are much stronger than this number suggests, but the framework doesn't reward potential.

3. Cash Machine — PASS

This criterion looks at free cash flow generation relative to the company's asset base — and it's where Atlassian's business quality becomes unmistakable. Despite its GAAP losses, Atlassian generated approximately $1.28 billion in free cash flow on a trailing basis. The divergence between GAAP net income and free cash flow is largely explained by non-cash stock-based compensation expense, which depresses earnings without requiring any cash to leave the business. Atlassian's EV/FCF of approximately 13.9x is notably low for a software company growing at 20–25% annually. The cash machine criterion passes, and it passes with conviction.

4. Fair Valuation — PASS

The fair valuation criterion requires an earnings yield (the inverse of the P/E ratio) of at least 3.5%. With Atlassian trading near multi-year lows and analyst consensus projecting FY2026 EPS of approximately $4.95 (non-GAAP), the forward P/E sits around 13.57x — translating to an earnings yield of roughly 7.4%. That's more than double the Buffettology threshold, and it reflects how dramatically the stock's multiple has compressed from the 80–100x forward earnings levels it carried at its 2021 peak. The stock now clears this criterion comfortably.

5. Share Buybacks — FAIL

Buffett prefers companies that reduce their share count through buybacks. Atlassian does the opposite: like most high-growth enterprise software companies, it issues substantial stock-based compensation to engineers, product managers, and sales staff. This grows the share count over time and dilutes per-share value for existing holders. Until the company generates enough free cash flow to both compensate employees and meaningfully offset dilution through repurchases, this criterion will fail.

6. Defensible Moat — PASS

A gross margin above 40% signals pricing power and competitive durability. Atlassian's gross margin is 84.06% — among the highest in all of enterprise software. Once the infrastructure is built, each additional dollar of subscription revenue flows through at near-zero incremental cost. The product's embeddedness in engineering workflows creates switching costs that are hard to overstate: a company that has built its entire development process around Jira doesn't switch to a competitor without significant disruption, retraining, and integration work. Atlassian passes this criterion decisively.

7. Simple Business — PASS

Atlassian makes software tools that help teams plan, track, and collaborate on work. The revenue model is subscription-based, with pricing tied to the number of users and the features accessed. The business is easy to understand — customers pay monthly or annually for access to cloud software, and they tend to add more users and products over time. The technological complexity lives inside the product; the business model itself is straightforward.

8. Conservative Debt — PASS

The debt-to-equity threshold is 1.5x. Atlassian's debt-to-equity ratio is approximately 0.76x — well inside the acceptable range. The company's enterprise value of $17.80 billion is actually slightly below its market cap of $18.15 billion, suggesting net cash exceeds gross debt. For a company that has been investing heavily in cloud infrastructure and AI development, maintaining this level of balance sheet discipline is noteworthy.

9. Consistent Growth — FAIL

Buffettology's consistent growth criterion requires positive, sustained net income growth over the prior five years. Atlassian has grown its revenue dramatically over this period — from roughly $2.1 billion in FY2021 to $5.22 billion in FY2025 — but has reported GAAP net losses throughout. The company's earnings have been consistently negative, not consistently growing. This is the fourth and final failing criterion: impressive as the revenue trajectory is, Buffett's framework measures growth in earnings, not growth in revenue.

The Bull Case

Atlassian's 5/9 score and 74% drawdown from peak levels have created an unusual setup. The bull case is grounded in real fundamentals:

The valuation reset is historic. Atlassian traded above 30x trailing revenue at its 2021 peak. It now trades at approximately 3.1x trailing revenue and 13.57x forward earnings — a compression that puts it in line with mature software companies, not hyper-growth ones. If the company continues growing at 20–25% annually and margin expansion follows, the current price could represent a significant disconnect between market sentiment and business fundamentals.

Free cash flow tells a better story than GAAP earnings. $1.28 billion in annual free cash flow is real money that the company can reinvest, pay down debt, or eventually return to shareholders. The gap between FCF and GAAP net income is driven almost entirely by non-cash stock-based compensation — which is a real cost of attracting talent, but not a sign of business deterioration. The EV/FCF ratio of approximately 13.9x is inexpensive by any measure.

The RPO surge signals durable revenue ahead. Remaining Performance Obligations grew 44% year over year to $3.8 billion, and record multi-million-dollar enterprise ACV deals are being closed at increasing frequency. This contracted backlog represents future revenue that is already committed — it de-risks near-term growth estimates and suggests the transition from SMB self-serve to enterprise is taking hold.

AI is creating new monetization surfaces. Atlassian's Rovo AI product reached 5 million monthly active users, and the company is embedding AI capabilities across Jira and Confluence to automate repetitive workflows. Management raised its 2026 cloud revenue outlook and reaffirmed a multi-year CAGR target of 20% or more. If AI-powered features drive premium upsells at the enterprise level, the revenue ceiling expands materially.

Analyst consensus is strongly bullish with significant implied upside. 20 of 24 covering analysts carry Buy or Strong Buy ratings, with an average price target of approximately $206. Even the most conservative analyst targets imply meaningful upside from current levels. The contrast between analyst conviction and market price reflects a sentiment gap that often resolves in favor of fundamentals over time.

The Bear Case

The 74% decline in Atlassian's stock price reflects genuine concerns that shouldn't be dismissed:

GAAP losses persist despite years of scale. Atlassian crossed $5 billion in revenue in FY2025 and still reported a net loss of $189 million. For a company with 84% gross margins, the persistence of GAAP losses reflects how much is being spent on stock-based compensation, sales, and R&D. There's no guarantee that expense discipline improves — especially if AI requires continued investment to remain competitive.

Free cash flow growth turned sharply negative. While the absolute level of FCF remains strong, recent quarters showed FCF growth declining by more than 400% on a year-over-year basis — a significant reversal that suggests near-term cash flow is being consumed by investment cycles. If FCF margins compress materially, the primary bull case argument weakens considerably.

AI disruption risk is the market's central concern. Enterprise software stocks have moved from being perceived as AI beneficiaries to being perceived as AI disruption targets. The fear: that AI-native tools (from startups or hyperscalers) could displace Jira and Confluence by offering comparable functionality at lower cost with less integration burden. This thesis isn't proven, but it's driving multiple compression across the category — and Atlassian hasn't yet demonstrated that Rovo AI is a meaningful revenue driver rather than a defensive feature.

Competition is intensifying from multiple directions. Asana, Monday.com, Notion, Linear, and GitHub (project management) are all competing for Atlassian's customer base. Microsoft Teams with integrated Azure DevOps represents a particularly credible bundled threat at the enterprise level, where procurement decisions favor vendors with existing Microsoft relationships. Baird downgraded TEAM to Neutral in 2025, specifically citing go-to-market execution concerns.

Insider selling has been elevated. Atlassian's founding executives and institutional insiders have been selling shares at a higher rate than typical — a bearish signal that the people closest to the business may not view the current price as a clear opportunity. Insider selling alone doesn't determine outcomes, but it's a data point that deserves acknowledgment in the broader risk assessment.

Valuation Overview

Atlassian's valuation picture is genuinely unusual for a large-cap software company in 2026:

• Trailing P/E: Negative (GAAP net loss of $189M)
• Forward P/E: ~13.57x (FY2026 non-GAAP EPS estimate of ~$4.95)
• P/S Ratio: ~3.15x (vs. sector median of approximately 9–12x for enterprise SaaS)
• EV/FCF: ~13.9x
• Debt/Equity: 0.76x

The forward P/E of 13.57x stands out. At its 2021 peak, Atlassian carried an implied forward multiple above 100x. The multiple compression over the past several years has been extraordinary — driven partly by rising interest rates (which compress high-duration asset valuations) and partly by AI disruption fears that have hit the broader software sector.

For context, comparable enterprise software companies growing at similar rates typically trade at 25–50x forward earnings. If Atlassian's forward P/E were to re-rate toward even the low end of that range — say, 25x — the implied price would be roughly $124 per share, representing significant upside from current levels. The gap between current valuation and historical peer multiples is one of the reasons analyst price targets average approximately $206.

The P/S ratio of 3.15x is even more striking. Atlassian traded above 25–30x revenue at its peak. The current level is consistent with mature, slower-growing software companies — which Atlassian demonstrably is not, given 20–25% revenue growth guidance.

Simply Wall Street estimates intrinsic value near $245 per share based on discounted cash flow analysis. While DCF models are sensitive to terminal assumptions, the gap between that estimate and current market prices suggests the market is pricing in significant execution risk or multiple compression that may prove overstated.

The Buffettology Verdict

Atlassian's 5/9 Buffettology score captures the essential tension in this stock: a business with genuine franchise characteristics — 84% gross margins, $1.28 billion in free cash flow, low debt, and a sticky product embedded in the workflows of 300,000 organizations — that still can't clear Buffett's strict profitability hurdles.

The failing criteria — negative ROE, negative ROIC, share dilution, and absent earnings growth — are all symptoms of the same root issue: Atlassian is spending its way through a cloud migration and an AI buildout, and GAAP earnings haven't caught up. Buffett's framework is designed to identify companies that compound wealth without requiring constant reinvestment at the expense of earnings. Until Atlassian demonstrates consistent GAAP profitability, it will remain in the "interesting but incomplete" category under this lens.

The framework also reveals something counterintuitive about the current setup: Atlassian now passes the fair valuation criterion. A company that couldn't have cleared Buffettology's earnings yield test at almost any point in the last five years now does — because the stock has fallen far enough that forward earnings yield exceeds the required threshold. That's a meaningful shift, and one that deserves attention from investors who apply this framework seriously.

The stock is not a Buffett-style certainty. But at 5/9 — with a cash machine passing, a defensible moat passing, manageable debt, and a now-reasonable valuation — Atlassian looks more like a business temporarily obscured by accounting convention than one with a fundamentally broken model.

Check TEAM on Buffett Score

Want to screen for stocks that pass all 9 Buffettology criteria? Download the Vetted app to explore Buffettology analysis across thousands of stocks, alongside scores from multiple expert investment frameworks.