Strong Insider Buying Makes Asana Perfect for the Long Haul
Asana (ASAN: $24)
Coverage initiated May 13, 2022 at $24 in the Aggressive portfolio
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Asana is becoming increasingly popular as an enterprise-level work collaboration solution. The company's platform enables teams to orchestrate daily tasks and strategic initiatives, and manages product launches, marketing campaigns, and organization-wide goal settings. The stock has had a rough couple of months, dropping 85% from its peak of $146 in November. It is trading at its IPO price of $21 during its direct listing in late 2020 and as you know, investors have fallen out of love with fairy tale tech growth stocks that so far haven’t turned a profit. And note that Asana is not planning on being profitable this year.
Over the course of its six quarters as a publicly traded company, Asana has consistently delivered impressive growth rates and operational metrics, producing YoY revenue growth in excess of 50% each quarter. While the company still loses money, its losses as a percentage of revenue continue to decline, from 125% of revenue in 3Q21, to 35% in its most recent quarter. Their next earnings date is June 2.
We expect the company to be turning corners in 2023, driven by strong revenue growth and improving profitability margins, coupled with substantial insider buying in recent weeks. Given the increasingly distributed nature of work at organizations across the world, Asana helps provide a semblance of normalcy, which explains its growing popularity in the workplace.
Business Overview
Founded in 2008 by Mark Zuckerberg’s famed Harvard roommate and Facebook co-founder Dustin Moskovitz, Asana is an SaaS* tool for workplace collaboration, communication, and project management. Even though it was hardly a groundbreaking innovation at the time, Asana quickly gained traction among small teams, freelancers and startups owing to its intuitive interface.
*Software as a Service
Asana’s core premise was that an average knowledge worker spends nearly 60% their time “on work about work”; that is planning for meetings, communicating about work, and dealing with context switching*, without actually accomplishing any meaningful work. The platform enhances productivity by integrating all aspects of work and communications at one place.
*the tendency to shift from one unrelated task to another
Over the years, Asana has packed its platform with powerful features such as forms, workflow builders, the Work Graph data model, and approval systems, along with a robust admin system, APIs, and third-party integrations, effectively making its way from a niche tool for small teams and startups to an enterprise workflow solution used by Fortune 500 companies. What started off as a simple project and task management solution, is now a full-fledged solution to orchestrate work across an enterprise. With a relentless focus on optimizing workflows, reducing friction and boosting productivity, the company is employing machine learning, along with the Graph Workspace that allows searches, filters, and algorithms to help organizations unlock value in their processes.
Asana has successfully executed the “land and expand” business model, with its freemium pricing helping sign up 35 million registered users, out of which 2 million have been converted into paying customers. Not only does this large user base provide the company with crucial data on challenges faced by teams and organizations, it also represents significant untapped monetization capabilities.
The company has witnessed stratospheric growth over the past two years, driven by strong structural tailwinds arising from the pandemic and the resulting shift towards hybrid and remote work. At the time of its listing in 2020, the company had just 82,000 paying customers; now that figure stands at 114,000, including marquee logos such as Vodafone, Google, NASA and Uber.
Over 83% of customers surveyed in recent months agree that Asana improves job performance, with 77% agreeing that it saves time. The overall dollar-based net retention rate stands at 120% in its latest quarter, with the retention rates for customers with annual spends exceeding $5,000 and $50,000 at 130% and 145%, respectively, which speaks volumes on the platform’s value proposition.
Asana’s platform and products have received a series of honors and recognitions over the past few months, being named a leader in the IDC Marketscape Worldwide Collaboration and Community Applications vendor assessment. It was also recognized by Fast Magazine’s list of Brands That Matter, followed by Inc. Magazine’s list of Best-Led Companies 2021.
As the company continues to build on its work management capabilities, it will increasingly become a mainstay for organizations around the world. As it ingrains itself in the digitalized workflows of organizations, the resulting network effects will propel its next round of growth, all the while keeping competitive forces at bay.
Financial Analysis
In its most recent 3Q22 earnings, the company reported another quarter of stellar revenue growth at $110 million, up 70% YoY, compared to $70 million a year ago. Despite posting a loss of $43 million, or $0.23 per share, against a loss of $38 million, or $0.34, it beat estimates across the board, with plenty of strength on other key metrics.
The total number of paying customers grew by 7,000 during the quarter, to reach a total of 114,000; the number of customers with annual spend exceeding $5,000 grew 58% YoY to 14,000; and the number of customers with annual spending exceeding $50,000 grew to 740, up by a mammoth 130% YoY. The total number of paid users on the platform reached 2 million for the first time. Asana has a sizable RPO or remaining performance obligation to the tune of $190 million, up 87% YoY, which should be realized over the next few months.
Asana witnessed significant improvements in gross margins, which stood at an impressive 90% during the quarter. The bulk of the company’s expenses arise out of research and development, followed by marketing, and general administrative expenses, amounting to a total of $160 million during the quarter. Considering the rate of revenue growth in recent quarters, the company remains on the cusp of operating profitability.
The company ended the quarter with $340 million in cash, and $250 million in debt. It projects revenues for 4Q22 at $105 million, representing YoY growth of 54%. It is projecting a loss of $52 million, or $0.28 per share. Even with the negative cash flow at $30 million during the quarter, the company has a sizable runway of cash reserves to keep it afloat, with plenty of options to raise additional funds if needed.
Competitive Analysis
A key concern among investors is the fierce competition in this space, which includes the likes of Monday, Atlassian, Trello, and even industry bellwethers such as Salesforce.
The biggest trump card on Asana’s side, however, is its massive user base, the envy of its existing competitors and newer entrants. The company is capable of tracking and maintaining heaps of user data to guide its future developments and capabilities, all the while tapping new trends and opportunities, and deploying solutions to its captive user base before competing firms can gain traction.
Asana is no longer in the project management space - it is a leader among work management platforms. Given the company’s obsession with design, user experience, and intuitive interfaces, it has a significantly lower learning curve compared to other platforms, while still offering similar levels of customization and sophistication as required.
BMR Take
Given Asana’s growing traction in this niche, and the massive addressable market, comprised of 1.2 billion knowledge workers throughout the world, expected to be worth $32 billion by 2023, this company’s growth story is just beginning. Even with the pandemic receding, there are strong secular trends pointing towards long term remote and hybrid work becoming the norm.
While there are many companies working to address this segment, Asana is clearly the winner when it comes to reach. The pecking order in the long run ultimately comes down to which company does the best in keeping up with the evolving market, and given Asana’s background of execution, we have plenty of reasons to favor it.
Asana currently trades at less than 10 times sales. It is relatively cheaper compared to competitors like Monday, trading at 12-15 times sales. These valuations are not at all expensive when you consider the extraordinary YoY growth rates experienced by these companies.
Taking all of this into consideration, Asana clearly shows a lot of promise, and given its market cap of just $3.8 billion, it has plenty of runway ahead to generate value for investors. The company’s shares are seeing plenty of activity in recent weeks, triggered by insider buying, namely the founder and CEO, Dustin Moskovitz, buying $1.1 billion worth of his company’s stock in the last year. As Peter Lynch said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” Moskovitz’s aggressive buying in recent months, and his current holding estimated at 17% of the company, means his interests are perfectly aligned with shareholders. We expect plenty of fireworks in the future of this company, and we are excited to be a part of the ride.
