Atlassian shares fell sharply on Friday as investors appeared to sour on the software company's slowing cloud revenue growth. Some analysts believe the selloff was unwarranted.

Shares of Atlassian sank 16% to $154.418 in premarket trading on Friday after falling 3.4% on Thursday. If the decline holds, it would mark the stock's largest daily percentage decrease since November 2022, according to Dow Jones Market Data.

Atlassian reported fiscal first-quarter adjusted earnings of $1.65 a share, above estimates of $1.44, according to FactSet. Revenue grew 24% year over year to $1.77 billion, exceeding estimates for $1.71 billion.

Cloud revenue growth, a closely watched measure of Atlassian's performance, slowed to 30.5% year over year from 30.8% in the preceding fourth quarter. It marked the first time in six quarters that cloud growth failed to accelerate, according to BTIG.

Cloud revenue totaled $1.3 billion in the first quarter, above Wall Street's projection for $1.28 billion.

Atlassian raised its fiscal 2027 cloud revenue growth forecast to 26% from 25.5%. The company also projected cloud revenue growth of 27% in its fiscal second quarter, suggesting a slowdown from the first quarter.

The outlook implies cloud revenue growth could slow further in the second half of fiscal 2027 to roughly 23% to 24%, according to Cantor Fitzgerald analysts.

Atlassian attributed some of its cloud revenue performance to large enterprise customers signing multiyear agreements to migrate from its older data center products. Those agreements allow customers to use both systems during the transition, shifting some revenue away from its cloud business.

The company also cited tougher year-earlier comparisons, the impact of its DX acquisition, and broader economic uncertainty as reasons for its cautious outlook.

But some analysts argued the market's response was excessive.

BTIG analysts argued the decline was an "overreaction," pointing to continued demand from Atlassian's large enterprise customers. The analysts maintained a Buy rating on the stock, but lowered their price target to $240 from $260, implying 31% upside from Thursday's closing price of $183.29.

Guggenheim analysts similarly posited that the slower cloud growth hardly justified such a sharp drop. The analysts characterized the shift in revenue between Atlassian's cloud and data centers as "benign," noting that customers are still generating additional revenue for the company as they migrate to the cloud.

Adoption of Atlassian's artificial-intelligence tools also grew. More than 87% of its enterprise cloud customers are using Rovo, the company's AI assistant, while more than 3,000 customers upgraded to its Teamwork Collection, a sevenfold increase from a year earlier.

Cantor Fitzgerald analysts suggested that growing use of Atlassian's AI tools could strengthen its business rather than threaten it, as customers increasingly incorporate the technology into their existing workflows.