Updating Airbnb, Fortinet, and Atlassian

Quarterly reports are rolling in fast and furious. Let's take a look at 3 more in this article, from Airbnb, Fortinet, and Atlassian.

Airbnb (ABNB)

There's been a fair bit of press around New York City's recently passed "Airbnb Law" that effectively outlaws the business inside city limits. It has certainly affected the stock price some, and it is something to keep an eye on elsewhere, although it seems unlikely to become a trend (and isn't all that popular in NYC). Regardless, NYC is just 1% of Airbnb's business so it isn't hugely material, but makes for a lot of noise in the news.

Airbnb's quarter was largely as expected, with sales up 18%, gross booking value up 17%, and nights and experiences booked growing 14%. These are all within our mid-teen's growth expectations. Profitability was very strong, with operating income margin coming in at a record 44%, and free cash margin similarly impressive at 39%. For all the noisy articles I've seen about a "supply glut", Airbnb still grew its active listings 19% in the quarter.

Going forward, the company sees some headwinds given expected economic weakness, which travel is quite sensitive to. Nevertheless, management also guided for continuing strong profitability. After some small adjustments, I'm bumping the fair value estimate from $142 up to $150. The stock looks like a pretty good buy at present, but not quite at the 25% margin of safety I like to see.

Fortinet (FTNT)

Fortinet's Q3 results and the market's reaction were a lot like what happened the prior quarter. Results were decent - total revenues were up 16%, and service revenue expanded 28%. Again, the story was weak product sales (down 0.6%), as the company is experiencing a pullback in demand for secure networking hardware. We mentioned volatile hardware sales as a risk in the initial write-up, and we are seeing that come to pass at present.

In the mid-term, CEO and co-founder Ken Xie mentioned the company would be pivoting more of its resources towards its efforts in Secure Access Service Edge, or SASE. This is a cloud architecture that combines network and security functions (firewalls, secure gateways, Zero Trust access) and is offered "as a service" through the cloud. I like this pivot a lot, as SASE sales are more reliably recurring.

Big picture, Fortinet still looks substantially undervalued. Secure networking isn't going anywhere long-term - it is a $100 billion market. Hardware sales will recover in time. In any case, Fortinet is 60% services now anyway. The market continues to give us a good buying opportunity on this overlooked security stalwart. However, it is prudent to lower the fair value estimate to account for the near-term weakness in hardware sales. I'm dropping it down to $90 from a previous $106.

Atlassian (TEAM)

Atlassian continues down its cloud transition. It is now well underway, and we continue to see the effects. Overall revenue in Q3 was up 21% year-over-year, with the subscription side growing 31% but legacy maintenance revenues falling 31%. We are probably in for several more quarters of this until the bulk of the transition is complete.

Aside from that, Atlassian continues to chug along. It acquired Loom, a video messaging platform, to build out the firm's communication offerings. It also acquired AirTrack, allowing firms to better track their critical assets as part of the JIRA Service Management offering. Financially, the quarter looks fine, and free cash margin is beginning to rebound from what looks like a nadir last year (this is typical in on-prem to cloud transitions).

Atlassian is performing mostly to plan, although with revenue guidance a bit below what I was looking for, the fair value price drops a few bucks to $181 (from $184).