Shares of productivity software company Asana (ASAN 11.61%) have fallen 71% since hitting their all-time high late in 2021. The rapid drop in shares has coincided with a drop in tech and growth stocks generally, which are falling as investors adjust post-pandemic expectations and the expectation for higher interest rates.
These macro factors have hurt shares, but the business has been performing extremely well. The question now is around how Asana should be trading off growth for cash flow to fund the business on its own.
Image source: Getty Images.
Asana's growth is staggering
Let's start with the growth story. You can see below that Asana has been growing like crazy, and in the recently reported fiscal fourth quarter of 2022, the company said revenue was up 64% to $111.9 million. In fiscal 2023, management expects revenue to grow another 49% to 51%.
ASAN Revenue (TTM) data by YCharts.
This rate of growth is amazing for any company, but it's how Asana is growing that's so impressive. Paying customers increased 28% over the past year to 119,000, and customers spending over $50,000 per year increased 125% to 894. The company is adding customers at a rapid rate, and it's quickly moving them up the revenue curve. This is exactly what you want to see from a SaaS (software-as-a-service) stock.
Why investors are worried about Asana
It's not surprising that a growth company like Asana is losing money. But the scale of the losses is staggering, as you can see above. In the fourth quarter, net loss was $90.0 million and cash from operations was a negative $39.3 million.
In fiscal 2023, management expects $527 million to $531 million in revenue and a non-GAAP (generally accepted accounting principles) operating margin of somewhere around -45%. At the midpoint, this implies about $238.1 million in non-GAAP operating losses over the next year.
For perspective, non-GAAP operating loss in fiscal 2022 was $157.1 million, or 42% of revenue. So, Asana's management expects losses to grow on an absolute and margin basis over the next year.
This is concerning because a company can only burn cash to fund growth for a finite amount of time. Free cash flow burn is lower than non-GAAP operating losses (negative $87.6 million in fiscal 2022), so investors would like to see cash burn turn around soon. Cash on hand was $315 million at the end of the fiscal year 2022, so Asana likely has only about two years of cash at the current burn rate, assuming it doesn't raise capital. The clock is ticking on the cash-flow turnaround.
Why Asana stock is still a buy
There's no question that Asana's cash burn is concerning and if the problem gets bad enough it will have to raise capital. But it's also hard to ignore a company growing this quickly.
I think management will be able to tone down spending enough to keep growing at a high rate and ultimately get the positive cash flow. That may not happen for a couple of years, but when Asana starts to see revenue growth exceed spending growth, this could be a cash flow machine.
If that isn't enough, founder and CEO Dustin Moskovitz has bought over $1 billion of Asana shares at a higher price than they're trading at today. If he's bullish on the stock, so am I.
