What if I told you that in just a few days, you could be one of the first public investors in a company that's helping to define a new market category of software? Don't answer just yet. What if that company was already experiencing incredible growth and had captured almost a third of the Fortune 500 as clients? But wait, there's more. How about if its CEO and co-founder already had a proven track record as a Facebook co-founder, and this new company has been recognized numerous times as a best place to work? Interested in finding out more? If you are, read on.
The company I'm talking about is Asana, which plans to go public at the end of the month, trading on the NYSE with the ticker symbol ASAN. Let's dig into the details about this work-management software-as-a-service platform company to see if it could be a millionaire-maker for investors who get in early.
Asana was founded out of frustration
In the early days of Facebook, co-founder Dustin Moskovitz and his engineering manager, Justin Rosenstein, were frustrated by the amount of coordination required to get projects done. To help their teams stay organized and aligned, they built an internal work management tool for their engineers to use. They left the social network in 2008 and founded Asana to make the software available for businesses around the world.
It turns out they were on to something. According to a third-party survey sponsored by Asana, today's "knowledge workers," employees paid to solve problems and perform non-standard tasks, spend 60% of their time on what Moskovitz calls "work about work." The study found that this 60% was spent on activities such as attending unnecessary meetings, responding to email, or searching for information. And the number of these workers is growing.
The opportunity for software to help these professionals reduce what Asana calls "soul-grinding" time spent on clarifying and coordinating work is huge.
What does Asana's software do?
The application's core feature is to clearly identify who is expected to do what, and when each task is due. Users can easily create work tasks, build project schedules, and even create new tasks from applications like Slack. This sounds like something that all project management software tools should be able to do, but the edge for this platform is that everyone in the organization, not just project managers, are able to participate in the process.
As a former project manager, I can say that creating and managing a detailed project plan was my least favorite part of the job. The PC-based project management software I used wasn't very user-friendly or easy to share with colleagues and because of that, team members would rarely refer to the plan to prioritize their work.
The key to Asana's ability to save time for teams is that it provides an easy-to-use interface that allows every team member to participate in creating and managing project tasks. Team members also have a fully customizable view of what they are responsible for. These attributes make team members more "bought-in" to using the software, which provides clarity about what is expected on a day-to-day basis and which saves time. The fact that this tool provides management and stakeholders a real-time view of project status can significantly reduce the team's effort spent on administrative updates.
One Asana customer, interactive home-gym company Mirror has said that using Asana saved its team members an average of three to four hours per day. Given these kinds of results, it's not surprising Asana has been chalking up impressive revenue growth.
How's the business doing?
Asana has more than 82,000 paying customers in 190 countries, including 30% of the Fortune 500, and boasts clients such as Alphabet, NASA, and Harvard University. Last year, its top line grew 86% to $143 million, and in Q2, it posted a 57% year-over-year revenue gain. Existing customers are helping to fuel that growth as its dollar-based net retention rate clocked in at a solid 115%, with an even stronger 140% rate for those customers that spend more than $50,000 with the company annually.
At this point, the company is still funneling available cash into growth efforts. Research and development expenses are equal to 44% of its revenue, but as a result of that spending, it continues to deliver customer-focused improvements to its platform that are attracting new clients and delighting existing ones. Its sales and marketing outlays amount to 72% of its revenue, but given that only 3% of the employees of its current customers use its software, Asana has a tremendous opportunity to expand its footprint with them as well as by attracting new ones.
With these significant investments in growth, the company posted a loss of $118 million in its fiscal year ending Jan. 31, 2020, against $143 million in revenue. With $332 million in cash and marketable securities (as of April 30), this level of losses may seem unsustainable. But looking to the cash flow statement for its last full fiscal year, there are a number offsets to reduce the cash burn rate. Non-cash entries such as $48 million of stock-based compensation, $8 million of non-cash lease expense, and several other smaller items combined with net cash inflows of $18 million result in "only" a $40 million reduction in its cash used to fund operations over the 12-month period. This level of cash burn is more affordable, allowing management to forgo profitability for an extended period of time, which is critical in this crowded market.
A large and developing market
IDC estimates that the addressable market for collaborative applications and project and portfolio management will hit $32 billion by 2023, and numerous companies are looking for a piece of that pie. Motley Fool service Blueprint has reviewed the top project management tools, and the number of entries on the page can give investors an idea of just how competitive a landscape Asana is operating within. IDC and Forrester have named Asana as a category leader for work management software tools, giving the platform a crucial boost of credibility.
Despite facing numerous strong challengers, Asana's leadership says its largest competitor is the inefficient status quo of sticky notes, spreadsheets, and hard-to-use PC-based project tools. Its easy-to-use collaboration features are a huge advantage when it comes to winning over new customers who don't already have cloud-based work management tools. Additionally, with a customer-focused R&D organization building on the established platform, it's likely that it will only become more attractive to users over time.
Is this a millionaire-maker opportunity?
When public trading in Asana shares begins via a direct listing on Sept. 30, the company is entirely likely to trade at a premium to the $5.3 billion market cap it has been valued at in the private markets. Spotify and Slack, which also went through the direct listing process, saw premiums to the direct listing reference prices when they first started trading in the public markets. If its market cap lands in the neighborhood of $7 billion, its enterprise-value-to-sales ratio would about match Okta's sky-high level of 39.
Given it could have a pricey starting point, could this stock's price grow 10-fold or more, which would position it to fall into the millionaire-maker category for shareholders? It's possible, but it's too early to tell, given that Asana hasn't had a single quarter as a public company.
But a pricey valuation doesn't mean it's a lousy investment. Its goal is to be the market leader in the developing market of work management, and in that niche, it has a huge runway for growth. Its proven growth-focused strategy and its solid platform give the tech company the opportunity to be a market-beating investment over the long term.
I'm impressed with all that this company has going for it and will be starting a position once shares become available to the public.