The stock for work-collaboration software company Asana (ASAN 1.09%) has had an impressive run since its direct listing in September 2020, with the price up nearly 141% compared to the S&P 500's 39% gain over the same timeframe. That runup even includes a drop of approximately 56% over the past month or so as the broader technology sector has seen a pronounced sell-off.
This seemingly big recent sell-off doesn't appear to be related to Asana's business performance (more on that below) and is more related to broader market volatility at the moment. Asana has shown strong overall performance since its public markets debut, and there's still plenty of potential ahead, making it a smart addition to the long-term investor's portfolio. Let's discuss further why this stock is a great long-term bet.
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Meeting the market opportunity
According to Asana, knowledge workers spend 60% of their time "on work about work" such as email and meetings. Asana's mission is to streamline this work and improve productivity by offering a range of software solutions for all kinds of customers from individuals to global organizations. These software solutions are meant to reduce time spent on email, gathering information about projects underway, and improve internal communications.
Asana has had six quarters as a public company and the results have been impressive. By almost any financial and business performance metric, Asana has grown and improved. Revenue has seen steady and strong growth that has improved over time. In the third quarter of fiscal 2022, which ended Oct. 31, 2021, year-over-year revenue growth was 70%. In Q3 of fiscal 2021, revenue growth was only 55%. Additionally, gross margin improved from 88% to 90% over that same time frame.
While Asana is not yet profitable, it is heading in the right direction. In Q3 the company reported a net loss of $69 million. In absolute dollars, this loss was smaller than the year-ago quarter. Additionally, as a percentage of revenue, Q3's loss of 35% was an improvement over Q3 the prior year when the loss was 124% of revenue. With strong revenue growth and improving profitability margins, Asana is showing it has a popular product and is able to run the business efficiently as it scales. It bodes well for the future if these trends can continue.
Growing the business
Asana operates using a "land and expand" model, where its free offering brings in many users who then hopefully see the value in the product and purchase a subscription. Of the 35 million registered Asana users, only 2 million are paid users. This is a large base of potential subscribers already using the product that Asana can try to turn into subscribers. To that end, in the most recent quarter, paying customers are up 28% year over year, showing the company's success in monetizing its user base.
Asana also uses numbers of customers spending over $5,000 and $50,000 as metrics to gauge its business growth. In Q3, both of these cohorts saw growth that outpaced Asana's overall growth. Year-over-year growth for customers spending over $5,000 and $50,000 grew 96% and 132%, respectively.
Existing customers are also spending more each year. In Q3, Asana's dollar-based net retention rate -- a metric that shows how much more existing customers spend compared to the previous year -- was over 120%. More encouragingly, the dollar-based net retention rate for the customers spending more than $5,000 and $50,000 was even higher, at 130% and 145% respectively. Asana has shown an ability to not only attract new customers but also turn them into subscribers who will then spend more money in future years. With these kinds of results, it's easy to see profitability on the horizon as Asana scales.
A gift from Mr. Market
As one might expect, Asana's performance and future prospects have resulted in an expensive valuation. At the time of this writing, Asana is trading for a price-to-sales (P/S) ratio of 34. While that isn't exactly cheap, the recent sell-off in tech stocks has brought that ratio down from its high of 72. By comparison, Asana is less expensive than competitor Monday.com, which has a P/S around 60 and has only returned 72% in stock price appreciation so far this year.
For investors who intend to buy and hold companies for the long term, Asana has all the makings of a smart investment. Its impressive revenue growth and improving profitability help justify its valuation, which is the lowest it's been in months. If Asana's paid customers can come anywhere close to the 1.2 billion workers it views as its addressable market, we're only at the beginning of its growth journey.
