Asana Investment Thesis: 90% Gross Margins

Asana Inc. [NYSE: ASAN] operates a software as service (SaaS) work management platform that enables users to capture, plan, organize, assign, and distribute tasks, simplifying team-based work management, thus bringing ease, focus and flow to the work. It helps plan marketing campaigns, streamlines processes, manages sales and product launches.

The company, formerly known as Smiley Abstractions, changed its name to Asana Inc. (a Sanskrit word that refers to the place and pose in which a yogi sits) in July 2009.

Asana, founded by Dustin Moskovitz, one of the founder engineers behind Facebook (FB), has been flying high over the past few months but is Asana a Buy or a Sell?

The Bull Case for Asana

There were many factors supporting the rally in stock price. To begin with, the entire market was rallying, and there was a revival in appetite for growth stocks. A stellar Q1 results also played an important part in supporting the price rise, and now shares of Asana are over 120% on the year.

Asana offers both, near-term appeals plus longer-term tailwinds, which supports a bullish view of the stock. 

First and foremost, continued rollout of remote-work and hybrid-work structures is going to up the demand for online collaboration and workflow management tools like Asana, which helps distributed teams with planning and task allocation.

Also, Asana’s revenue growth accelerated to 61% year-over-year, up from the 59% rate posted last year, which is among the highest in the software sector.

The company’s gross margin is of around 90%, a feat achieved by few companies in the software industry.

Impressive Quarterly Earnings

Asana’s performance has indeed been impressive, and the company’s fundamentals were a key driver behind the surge.

Asana, in Q1, grew revenue at 60.7% year-over-year to $76.7 million, easily outpacing expectations of $70.1 million (+47% y/y). Even more impressively, Asana managed to accelerate its revenue growth versus a 57% year-over-year pace in Q4.

Asana continues to pick up more and more new customers at a rapid pace. The company had over 100,000 paying customers (Asana has a free-to-use tier with limited features) as of the end of Q1, adding 7k net-new customers in the quarter, up from 4,000 added in the previous quarter. And growth in the number of paying customers accelerated for the third quarter in a row to 30% year-over-year.

Also, dollar-based net retention rates continue to be strong. For customers spending $5,000 and above, it was 123%. And, for customers spending $50,000 or more, it was over 140%.

Asana also has a robust growth roadmap ahead of it. The company is actively working on increasing its language capabilities to capture more business overseas.

Why Buy Asana Stock – Takeaway

Asana, undoubtedly, is one of the highest-quality companies in the enterprise software sector. It operates in the emerging segment for e-collaboration, which is experiencing both, short-term and long-term tailwinds.

Overall, the long-term opportunity for this company is vast, given the fact the company is growing its customer base at an impressive pace by providing scalable, cross-functional, and easy-to-adopt solutions for work coordination. 

To sum it up, Asana’s strong quarterly results and a rosy outlook make it one of the best investment opportunities in the workplace management software space.

The Bear Case for Asana

Asana continues to benefit from a largely untapped market and favorable reputation of its management. Remote-work and hybrid-work structures are likely to boost Asana’s appeal in times to come. However, there are a few factors that could sour investors’ sentiments in this high-flying stock.

At the macro-level, there are unknown risks of inflation and, more importantly, surging Delta-variant coronavirus cases, which can destabilize the stock market. Also, there are many competitors in the space, though Asana belittles threat from competitors claiming the segment it operates in to be largely a greenfield opportunity, with most of Asana’s estimated 1.25 billion seat addressable market not using any such tools yet.  A greenfield opportunity refers to a market that has never been commercially exploited and is free for the taking.

But the biggest concern could be its high valuation. Even when we look ahead to the next couple of years where the company is expected to generate over $435 million in revenue (representing 29% y/y growth), Asana still trades at a rich 24.3x EV/FY22 revenue.

All in all, the company’s overripe valuation, plus its relatively heavy operating losses, warrants some caution on the part of the investors. It’s better to let things cool off a bit before making an investment.

Asana Stock Price Forecast

One-year forecasts for Asana range from $19.00 to $80.00.

On average, it is anticipated that Asana’s price could reach $48 in the next twelve months. This suggests that the stock has a possible downside of 27%.

Is Asana Stock a Buy?

Cloud-based software applications were already registering a healthy growth rate before the pandemic, and the advent of the Covid-19 crisis further accelerated this progress, as more applications moved to the cloud last year. Against this backdrop, Asana made its public debut via IPO in mid-2020.

The company emerged as a solid performer during the pandemic, and the rapid growth story is likely to continue as it is expected that the migration to the cloud will continue even as the restrictions imposed by the pandemic continue to ease.

Top Project Management Software

There are quite a few well-known project management software in the market. Amongst the better known are Trello and Jira, both of which are subsidiaries of Atlassian [NASDAQ: TEAM], the largest independent provider of workflow management software. 

Trello is a collaboration tool that organizes your projects into boards. Jira is an agile project management tool that allows you to plan, track, and manage all your agile software development projects from a single tool.

Tech tools like this are really popular in the market, generating exceptional returns for investors. Atlassian has produced a handsome return of close to 850% since its debut in December of 2015. 

Despite the popularity of its offerings, Atlassian has hardly mopped the floor in the project management space. We can find a growing number of workflow management apps currently in the market. One notable example of it is Workfront, which was recently acquired by Adobe [NASDAQ: ADBE].

However, despite the proliferation of workflow management software, Asana has managed to hold onto its own, with software reviewer G2 calling it the best amongst the lot. Tech researcher IDC also recently named Asana a leader among project management and workflow vendors, thanks to its easy-to-use interface and its ability to integrate seamlessly with other apps.

The same is reflected in its share price which is up close to 125% since its IPO in the autumn of 2020.

A Strong Financial Base To Build On

The company reported ($0.21) earnings per share for the quarter, beating the consensus estimate of ($0.27) by $0.06, compared to the consensus estimate of $70.14 million. Asana’s revenue for the quarter was up 60.7% on a year-over-year basis. During the same quarter last year, the firm posted ($0.31) earnings per share.

Asana reported a good quarterly result for the three months ended April 30, 2021, thus belying apprehensions of it being a pandemic bubble. The company earned $76.67 million during the quarter, a jump of 60.7 % year-over-year. For the full fiscal year 2022, overall revenue is expected to witness a 48% increase.

Underlying those figures are over 100,000 paying customers (Asana has a free-to-use tier with limited features), and overall dollar-based net retention of 115% in its last quarter – implying the average existing customer spent 15% more with Asana than 12 months ago.

The company’s growth has been impressive, and it has immense potential for future growth, given the fact it is a small company still in its nascent stage. In fact, the whole cloud-based project management space is poised for tremendous growth, offering space for all the players to get on to the growth bandwagon.

The Bearish Thesis Bottom Line

Could investing in Asana at this juncture help you reap rich dividends in future? Let’s not forget that it’s still early days for this business, and hence it is important to focus on the long-term potential of this project management toolset provider.

Atlassian is the clear-cut project and workflow management leader at this point, with Monday.com expanding rapidly as well. Though Asana has been getting top marks from experts, one should not forget that the competition is tough with a few competitors having the resources and the money to pose some serious challenges to Asana. 

All in all, the cloud computing industry is still in a growing mode, and Asana has a lot of potential, which means it can be a real long-term winner.

Asana Investment Thesis Conclusion

Investors interested in growth technology stocks may find Asana attractive. A leading player in providing a platform for work management and e-collaboration, Asana is one of the fastest growing companies in the enterprise software sector. As an e-collaboration platform, the company has been an obvious beneficiary of cloud computing and WFH trends.

Asana calls itself a mission-critical platform, and predicts a very rosy outlook for itself. The collaboration and workflow management tool predicts a $32 billion market by 2023, with over 1 billion information workers that could benefit from its platform.

ASAN management has claimed that, so far, it has captured just a measly 3% of its total customer base, which leaves plenty of room for future growth and expansion.

Asana offers a tool for workflow management and team collaboration. There are three aspects to improving team collaboration:

• Content: cloud storage;
• Communication: chat, video conferencing;
• Coordination: provides more clarity about who is doing what work, how and when.

Asana addresses the third aspect, and smoothens work collaboration by a feature called Work Graph, an up-to-date map of the work in the organization. It further provides integrations with other platforms such as Zoom [ZM], Slack, and Microsoft [MSFT] Teams to name a few.

The executive team continues to make significant investments in R&D, and this allowed the company to constantly come up with new features in its software. For example, recently Asana launched Universal Reporting, which is aimed at higher-level executives. Also, Asana recently launched Asana’s Channel Partner network across 75 countries.

Q1 Earnings Highlights

In the latest quarter, Asana generated $76.7 million in revenue.

• The net retention rate was 115%. It was 123% for customers paying more than $5,000, and 140% for customers paying more than $50,000. Customers paying more than $5,000 increased more than 50%, while customers paying more than $50,000 jumped over 90%.
• Asana added 7,000 new customers in the quarter, taking the overall customer count to more than 100,000.
• Asana expects total revenue in Q2 to be over $80 million.

An important aspect of this result is that it shows that the company is doing well in both, customer retention as well as customer growth. Also, the company believes that it has addressed just 3-4% of its total addressable market (TAM).

ASAN Investor Takeaway

Asana operates in the emerging segment for e-collaboration, which is poised for both, short-term and long-term tailwinds, thanks to factors such as migration to cloud and WFH. More importantly, it addresses a different aspect of work management than many others: work coordination. Asana is a leader in this category, with its Work Graph feature providing it with a distinctive competitive advantage.

The segment of the market in which Asana operates is in its early stages, and the company is poised for tremendous growth due to the large greenfield opportunity present in the market. To sum it up, Asana provides one of the best investment opportunities in the market for investors looking for a growth stock in tech sector.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.