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investment thesis
Asana (NYSE: ASAN) sold off after its latest earnings results were based on tepid fiscal year guidance that called for further slowdowns.Still, the work management space is still a relatively nascent market opportunity, and the company has The clear goal this year is to increase revenue again. At the same time, the company is successfully improving profitability.
Given that Asana is spending as a growth company and isn’t seeing much growth yet, perhaps its current valuation is justified. But looking at the long-term potential, such as a 90% gross margin, suggests there are many opportunities to gain leverage as revenue scales. Therefore, the stock remains a good choice.
background
Previous reports on the work management company date back to late 2021, when the stock was (briefly) trading around $140 and trading at a price-to-earnings ratio of 70x.Although I have always been optimistic about This stock is my top pick for 2021, and it’s clear that the stock is well ahead of its financial fundamentals, and I urge investors to take profits.
At that time, I gave an example. Even after three years of sustained high growth, the company’s price-to-earnings ratio was still as high as 20 times. Instead, what happened was that growth slowed and valuations returned to valuations more consistent with those of a mid-growth company in a high interest rate environment, causing the stock price to fall by about 90%.
Overall, analyst expectations for TAM growth in the work management space remain quite optimistic, so on that front, a slowdown in growth into the teens might raise some questions even for long-term investors, especially given the The Company has vigorously promoted (and continues to do so) its differentiated product offering through its “work picture,” in addition to its significant expenditures on sales and marketing (as discussed below), which currently does not appear to be Generate appropriate returns.
Fourth quarter results
Revenue was US$171 million, an increase of 14%, and a net loss of US$10 million. Asana said the company still faces macro headwinds.While this may be true, investors can still note that major competitors monday.com (MNDY) continues to grow strongly. Its net retention rate is 105% for core customers and 115% for customers worth more than $100,000. Note that this untapped enterprise opportunity remains a key part of this article, as only a median percentage of customer knowledge workers are currently using Asana.
Turning to profitability, operating profit margin fell by 9%, a significant increase of 16 percentage points from the same period last year. FCF saw similar improvements. Still, spending 50% of sales revenue and marking up only 14% growth is pretty meager.
The expenditure situation is as follows:
Gross profit margin was 90.1%. Research and development expenses were US$54 million, accounting for 32% of revenue. Sales and marketing revenue was $88 million, accounting for 51% of revenue, up from 62% a year ago. General and administrative expenses were $27.7 million, accounting for 16% of revenue.
Full-year revenue grew by 19%, of which the segment above US$100,000 grew by 29%. Non-GAAP operating loss margin improved significantly by 29 percentage points.
guide
For the first quarter, revenue growth is expected to be 10-11%, which is also the outlook for the full year. Nonetheless, as mentioned earlier, management aims to re-accelerate revenue growth. That means the growth slowdown has not yet bottomed out, although that’s not surprising given that most of the layoffs occurred in the first half of last year. On the other hand, there are many companies whose growth has slowed to single digits or even lower.
In terms of profitability, operating margins this year are expected to be roughly in line with Q4’s results (up 1 percentage point), although free cash flow is expected to be positive by the end of the year.
Asana expects net retention to bottom out in Q1-2 at around 100%, so any improvement will obviously come in the second half of the year at the earliest.
Valuation
The market capitalization is $3.6B, and the forward price-to-earnings ratio is only 5x. In principle, the company has the potential to achieve substantial profits, given its 90% gross margin. For example, the company could potentially generate 30% operating margin simply by reducing sales and marketing spend, which currently doesn’t appear to be generating much ROI (although it did say on the call that it was seeing those returns). This gives a price-to-earnings ratio of 15 times.
Of course, in the long run, assuming Asana achieves its goal of re-accelerating revenue growth after completing some layoffs (especially in the tech space) and its sales efficiency improves (focusing more on the enterprise segment), it should achieve Double-digit growth has been combined with improved profitability over time.
Since a company with 90% gross margins shouldn’t really have a P/E ratio lower than 5x, it’s clear that the stock can deliver double-digit returns to investors over time.
By comparison, Monday.com trades at a forward price-to-earnings ratio of 11 times, although its growth rate is indeed quite high. Smartsheet (SMAR), which also forecasts an economic slowdown into the teens, also trades at a forward P/E below 5x and earnings at about 30x. (While Asana clearly isn’t, Smartsheet’s comparison does show Asana’s earnings potential if it adopted similar spending discipline.)
Generally speaking, in the software space, valuations of 5-8x for low- to mid-growth companies are fairly common, although the averages have moved more toward the lower end of that range since inflation and interest rates rose. So unless growth slows further, valuations appear reasonable.
Earnings Conference Call
Asana launched Asana Intelligence last fall.
This is what makes asana different. Working graphs plus artificial intelligence are more than the sum of their parts. Because work maps serve as an organization’s map of documented plans and preferred processes, we have a unique opportunity to solve collaborative work problems because we have the most relevant context and data to create useful and accurate production output. We believe we are the only work management platform with this combination of artificial intelligence powered by clear, structured maps that show how work is actually done across the organization.
The technology industry is the vertical industry most affected. Asana noted that non-technical ARR grew up in their teens.
risk
The main risk is Asana’s ability (or failure) to re-accelerate its growth rate. During the call, management discussed several tailwinds it sees, such as customer layoffs in 2023 (particularly in the tech space) and the GAI product, which it sees as a competitive advantage and differentiator.
Important points for investors
In the short term, Asana’s growth deceleration has not yet bottomed out, causing the stock price to fall after the earnings report. Nonetheless, based on the expectation that the work management space remains a growing market, with ample opportunity both for greenfield and existing customers, a valuation of just 5x price-to-sales for the more patient investors is appropriate. The company has also made strides in improving profitability.
Basically, the valuation means the stock could achieve double-digit annual alpha even without a huge acceleration in growth. If Asana can indeed leverage its heavy sales and marketing spend (currently around 50% of revenue) to increase its growth rate more significantly over the next few years, investors could benefit from higher growth as well as increased revenue. Growth should lead to valuations.
