Nova-X Report’s “Productivity Supercharger” Stock

What's being hinted at by Michael Robinson?

Michael Robinson has a “teaser article” out now, outlining some of his rationale for investing in a collaboration software company… but neglecting {ahem!} to mention the name of said company.

So, naturally, questions roll in… and your friendly neighborhood Gumshoe does like to provide answers.

The article in question is here if you want to read the whole thing, but we’ll try to sum up his points and check out the clues for you.

Robinson starts with his basic “things are going well” spiel:

“… inflation remains tame because productivity is on a roll. The U.S. Labor Department just said productivity gains in the first quarter were the best we’ve seen in more than eight years….

“Wall Street now expects the Federal Reserve to remain dovish this year. If inflation is under control in a fast-moving economy, there’s very little risk the central bankers will really ramp up interest rates.

“For tech investors, this is particularly good news. After all, companies across the board have been adding tech platforms that bring in new growth, while also making workers more efficient.”

And then starts to hint about his favored stock…

“Today, I’m going to show you how you can ride this trend with what I call the ‘Productivity Supercharger.’

“It’s a stock that is set to crush the market over the next several years….

“To be fair to my paid members, I can’t reveal the name and ticker symbol. But it remains an open holding in our portfolio, and I see plenty of upside ahead.”

What other hints does he drop?

He says that the company has such a great product that they’ve never had a sales force — apparently, the stuff sells itself, and they now have 144,000 customers.

And apparently they sell a variety of collaboration and “teamwork” software solutions, starting with a “collaboration toolset” and building that out with new products they’ve developed and acquisitions they’ve made over the years. Here’s a bit more from the ad…

“Clients put together teams to come up with a new product or service idea. From there, they hand it off to another team that develops the concept and assesses the market. After that, yet another team builds out prototypes, before handing it off to the production team, and then on to the sales team.

“At every stage, these clients turn to the Productivity Supercharger for the next level of teamwork software.”

And a couple specific hints about those acquisitions:

“In January 2017, our Productivity Supercharger bought one of the world’s fastest growing project management services firms that had a focus on enterprise messaging (EM).

“This past September, the firm acquired the leading software provider that is used by engineers to quickly learn about software and website outages.

“And in March, our software dominator bought a firm that helps brings together the teamwork happening across an organization into an all-encompassing view that connects strategy, work, and outcomes.”

And the growth has been remarkable — they’ve grown sales at 41% a year over the past five years, from $215 million in 2014 to $1.5 billion projected in sales next year. And Robinson says that the stock has now doubled, so his subscribers have taken a “free trade” and sold half, but he still thinks it’s a good stock that can keep growing at 30-40% a year.

Which means we’ve got an embarrassment of clues, frankly — shouldn’t even need to pull the ol’ Thinkolator out of the garage for this one, but, well, we’ll do it anyway… it’s a nice day, and a little sunshine couldn’t hurt.

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And what answer does the Thinkolator provide this time? Why, this is good ol’ Atlassian (TEAM), which, though it has grown to address a much larger variety of businesses over the years, is mostly known for providing collaboration software that helps software developers build products.

And it has indeed grown like mad — they did have $215 million in revenue in 2014, before going public, and the analyst estimate is for $1.55 billion in revenue in 2020 ($1.2 billion this year). That growth comes with the crazy valuation metrics that we’ve grown accustomed to for cloud software companies — the stock trades at about 125X next year’s earnings estimates, and at a $30 billion market cap you’re paying more than 25X sales for the privilege of buying into this growth machine.

That’s not a determinant of success, necessarily, companies that are this expensive are widely expected to grow very well, and eventually that growth, if the trajectory continues, will let the fundamentals grow into the valuation. It is a determinant of volatility and risk, though, since even a mildly disappointing quarter could easily cut 30% from the stock price.

The shares got a Goldman Sachs “green light” about a week ago, which helped drive it up even further — though, as with many of these nosebleed growth stocks over the past couple years, the analyst price target has a hard time keeping up with the actual share price… Goldman upgraded Atlassian to “buy” and increased their price target to $125, and the stock jumped 10% on the news to immediately pass that $125 target.

I can’t tell you whether or not Atlassian is going to keep going up in a straight line — it’s ludicrous to trade at almost 30X revenues, and I’m not an expert on their products at all, but that doesn’t mean it can’t continue… and subscription software is inherently a high-margin business, so they should be able to get more efficient as they grow… though despite the claim that they don’t have a “sales force”, they do certainly spend on marketing — their Sales and Marketing Expense line has grown from 16% of revenue in 2014 to about 22% now, and there’s no particularly clear sign of increasing efficiency overall.

Their total operating expenses took up 91% of revenue last quarter, higher than any annual numbers they’ve put up as a public company — that doesn’t mean things are terrible, I’m sure the business has some seasonal trends and it’s likely that they’re continuing to invest in growth, which is sometimes enough to keep investors happy for a long time, but it does mean that there’s no sign of them immediately ramping up the profitability… so you really need to be comfortable buying not the income statement or the projected earnings for next year, but the “story” of continuing dramatic growth and “beat and raise” quarters.

Atlassian is in the midst of a three year period (2018-21) when they are expected to grow earnings at an average of almost 50% a year, though a big chunk of that happened this year (the estimate is that they’ll earn 82 cents in 2019, rising to $1.30 in 2021). For that growth, you’d expect to pay a premium — for me, 125X forward earnings is a bit too steep of a premium to get me excited to nibble here, particularly since the market cap is already above $30 billion, but your opinion may well be different. It has certainly been a great company to date, and is up 25% in just the past month, so I’m sure Michael Robinson’s subscribers are delighted with the recommendation so far.

Since parts of their businesses overlap to some degree, I’m guessing that the upcoming direct listing of Slack shares (now expected in mid-June, expected ticker SK) will drive some attention to Atlassian… though whether Atlassian shines or pales at the comparison we won’t know until we’re a bit closer (Slack is smaller and growing much faster, with arguably a trendier brand, but if the last private valuation of about $15 billion holds up when they begin trading it could be valued at an even higher Price/Sales ratio of close to 40, and is not particularly close to being profitable).

If you want some other “growthy” support for the notion of buying Atlassian shares, it is also both recommended and owned by the Motley Fool, probably their Rule Breakers service, and is rated “A” by Louis Navellier’s PortfolioGrader system that prizes “beat and raise” momentum stocks. Great company, scary price… let us know what you think of Atlassian with a comment below.

P.S. We collect investor opinions about newsletters, so if you’ve ever tried out Michael Robinson’s “entry level” Nova-X Report, please click here to let your fellow investors know what you think of the letter. Thanks!

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