Asana: Still losing money and still too expensive (NYSE:ASAN)

Asana, Inc. (New York Stock Exchange: ASAN) is a software company operating in the crowded space of work management tools. Stocks have been on the up lately, with their value rising an impressive 52% YTD. Of course, the company’s market value is still a long way off. the level reached during the COVID market bubble, however the recent performance in the market has been very well received by new and old shareholders alike.

I recognize that Asana is targeting an interesting and probably growing Total Addressable Market; however, after reviewing how the company has performed over the last 3 years, I came to the conclusion that it is not the right investment for me. There are some I like, like the sky-high gross margins and growing customer base, however the positives are outweighed by consistent losses and huge share dilution in my opinion. I don’t like the risk-reward in this price and personally I will stay out of it.

Asana targets an interesting niche in the IT market

As with many other software companies, Asana was founded when the co-founders experienced a problem firsthand and decided to fix it. While working at Facebook, they saw productivity suffer as employees wasted a lot of time just thinking about the job itself: who was working on what task, who was responsible for what project, etc. We’ve all experienced the endless stream of emails, messages, and spreadsheets that teams rely on to organize workflows. According to the most recent Asana Work Anatomy Index report, an estimated 58% of knowledge work is spent solely trying to untangle the interconnected web of collaborative work among many teams. Recognizing that work is primarily the result of cross interactions between different teams, Asana developed the Asana Work Graph, a technology that allows company employees to have an always-up-to-date record of every project, task, document that is currently in development in the company.

As simple as it sounds, Asana has clearly struck a chord with businesses, as the productivity benefits of adopting this technology quickly became apparent. After being implemented, Asana’s products quickly became structurally important to its customers, as evidenced by the company’s net dollar-based retention rate – this metric is very popular among software companies and, in practical terms, indicates how much Existing customers pay more compared to the old one. year. ASANA’s overall DBNRR is over 110%, but actually improves substantially when we consider that customer cohorts are spending more. According to the most recent filings, customers spending at least $5,000 per year had a DBNRR of more than 115%, while customers spending at least $100,000 achieved more than 130%. The fact that Asana becomes more important the more customers spend bodes well for the company’s land-and-spread model: many customers initially sign up for a completely free product or a free version of a paid one; However, once they realize the value the product provides, they often end up buying more seats and relying more and more on Asana to increase productivity.

Revenue growth was also much higher for buyers spending at least $100,000 per year compared to those spending just $5,000 (31% vs. 19%), again demonstrating the increasing value Asana brings to the big organizations. In a way, Asana exemplifies what is good about software companies financially. The costs of providing the product are incredibly low, especially once the business reaches a certain scale. As a result, Asana has consistently reported gross margins of around 90%, the best in class for any software company available on the market today.

The company is still a long way from profitability

While I appreciate the success in terms of the number of customers and the ROI they enjoy from implementing Asana into their workflow, I have to admit that I’m not particularly enamored with the company’s overall financial profile. Since going public in 2020, ASAN has typically posted very high annual growth rates of around 60-80%, clearly helped by lockdown orders issued by governments around the world in an attempt to slow the spread of COVID19. As impressive as this performance was, it cannot be ignored that over the last 8 quarters growth has slowed steadily, reaching 26% in the last quarter and will likely be around 18% for the full year if management guidance is considered. Still positive and all, but not as surprising as in the past. I get the feeling that we really have no idea what a normal environment means for a company like Asana, which adds uncertainty and clearly affects market sentiment towards the stock.

Also, while the company took advantage of cheap money and stay-at-home orders to invest heavily in its growth and attract a lot of customers, I don’t particularly like seeing Cash from Operations continue to turn negative quarter after quarter. I would expect ASAN to clearly show improvements in that regard considering the incredibly high gross margins, however that doesn’t seem to be the case so far. I must say that there are other companies like monday.com | A New Way of Working (MNDY), which are active in the same market and relatively similar in size, are operating with positive free cash flow and are clearly showing initial signs of scale

In this sense, the company’s last quarter showed very early signs of streamlining operating costs. In fact, this quarter was the first for the company in which operating costs did not increase year-over-year, but were flat, which, along with healthy revenue growth, resulted in an improvement in operating losses. from -$96 million to -$65 million. small steps.

While I don’t see ASAN showing significant signs of economies of scale, its balance sheet doesn’t look extremely reassuring either. In fiscal years 2020 and 2021, the company borrowed ($300 million and $180 million respectively) to bolster its position, as the cost of capital at the time was particularly low. In fiscal 2023, ASAN relied on a $370 million share issue to finance its operation, in a clear shift in strategy as the Federal Reserve raised interest rates and made access to cash very difficult. As a result, in the last TTM, Asana has spent $133 million just operating and now has about $523 million left in cash and cash equivalents. Again, nothing particularly to worry about, but definitely not the strongest financial profile I’ve seen lately.

Stock-based compensation and insider ownership

When I review software companies, I always spend some time reviewing their policies around Stock Based Compensation (SBC). Growing companies have traditionally relied heavily on issuing shares to partially compensate their employees in order to retain cash to invest in further growth. I have nothing against this strategy for growing companies because, in fact, I think it often makes a lot of sense: these types of companies are often trying to fuel their growth in order to reap the benefits of economic scale sooner rather than later. SBC’s compensation allows management to attract top talent by offering compelling compensation, while retaining more cash to use for investments, supposedly with good ROI, since they are high-growth companies. The natural result is the dilution of shares that directly impacts the current shareholders.

As it turns out, the Asana SBC seems to be getting a bit out of hand, as over the past 3 quarters, total outstanding shares have increased year-over-year by around 14%. That is a clear negative point in my opinion, because it means that current shareholders effectively own 14% less of the company compared to last year, a very significant number when you consider that a common benchmark for evaluating the potential investments is around 10% to 12% of the annual investment. return.

On the other hand, it is worth mentioning that the interns own a large part of the company, which is always good to see. CEO and co-founder Dustin Moskovitz has been a serial buyer of Asana shares since its initial public offering despite his share price continuing to plummet. According to the most recent reports, Moskovitz personally owns around 51% of the outstanding shares. Their frequent purchases of ASAN shares clearly show that management remains very optimistic about the company’s long-term prospects despite current dilution and losses.

Valuation and key points

Since Asana’s IPO in late 2020, the company’s stock has experienced both high and low times, like many of its peers. The stock price is down a staggering 85% from all-time highs, yet despite this massive price swing, stocks are still a long way from cheap. Since ASAN is currently unprofitable from both a free cash flow perspective and a GAAP perspective, assigning a valuation to stocks is very challenging as it requires several assumptions.

On a price-to-sales ratio, the stock is currently trading at a multiple of 7x, expensive on its own but actually cheaper than peers like Atlassian (TEAM, 13.4x) and monday.com, 12.2x), although it is understandable considering that both are currently already profitable.

If we consider an imaginary 20% FCF margin that is possible based on mature software companies of a similar nature (TEAM’s TTM FCF margin is currently 27%), that would imply a current price to potential FCF of 38x, which is still very expensive, especially considering that we are evaluating a purely fictitious profitability.

In general, I personally don’t think ASAN is right for me at this price. I would never bet against it as anything can happen and customers seem to like the product, however the stock is relatively expensive, the company is far from profitable and is currently diluting shareholders like crazy (around 14% YoY). I’m happy to stay out of this case. If I miss a big one, so be it: that’s often what investing is all about after all.