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Why Asana Stock Plunged 28% Today

By Nicholas Rossolillo – Dec 3, 2021 at 10:56AM

Key Points

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Earnings were good, but the market is punishing high-growth but richly valued stocks right now.

What happened

Shares of workflow and project management software outfit Asana (ASAN -1.78%) sank over 28% today as of 3:40 p.m. ET. The small cloud-based service company has been soaring ever since its initial public offering (IPO) in 2020, but after its third-quarter earnings update, the stock has now backtracked all the way to where it was this past summer.  

Even so, Asana stock is still up over 130% since its debut as a publicly traded stock last year. 

Someone using a laptop in a home office.

Image source: Getty Images.

So what

As for Q3 fiscal 2022 earnings (for the period ended Oct. 31, 2021), Asana posted year-over-year revenue growth of 70% to $100 million. However, losses widened compared to where Asana was this time in calendar year 2020. Free cash flow was negative $29.5 million in the quarter versus negative $19.5 million 12 months ago.  

The market has been punishing high-growth but richly valued stocks like Asana as of late, even though the threat of another wave of the pandemic (this time from the omicron variant) means digital tools like what Asana offers are here to stay. The good news for this company is that though it's spending aggressively to maximize its revenue expansion right now, cash and short-term equivalents still totaled $344 million at the end of October, offset by a term loan of just $35.6 million.  

Now what

Management said to expect at least a 53% year-over-year increase in the fourth quarter of fiscal 2022 revenue to about $105 million, though losses will remain steep for now. Asana is a hypergrowth software company, but shareholder over-optimism had gotten out of hand in recent months. That doesn't mean this isn't a quality business for the very long term.

However, even after the sharp sell-off, Asana stock trades for a premium 32 times current-year expected sales. Invest with that in mind, if you decide to at all, in this cloud-based software stock -- as well as fellow workflow management disruptor and recent IPO stock If you do buy, keep the bet small and be ready to add to your position gradually over time to take advantage of dips such as the one taking place right now.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Asana, Inc. and Ltd. The Motley Fool has a disclosure policy.

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