What happened
Shares of Asana (ASAN 2.74%) tumbled by 32.9% in April, according to data provided by S&P Global Market Intelligence. There was no significant news that would have directly affected Asana, but the stock has been slumping since November as investors broadly have been shifting away from growth companies with high valuations.
The S&P 500 was down 8.8% in April, and a wide swath of growth stocks dropped by double-digit percentages. Asana's most recent earnings report in March beat expectations, but the market is no longer rewarding companies that rack up gigantic losses to fuel their growth.
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So what
In its fiscal fourth quarter, which ended Jan. 31, Asana grew its revenue by 64% year over year to $111.9 million, and for its full fiscal 2022, its revenue rose 67%. Asana had 119,000 paying customers at the end of January, with more than 15,000 of them spending at least $5,000 annually with it.
Asana's work management platform is priced per user, so customers naturally ramp up their spending over time as they expand its use throughout their organizations. Its dollar-based net retention rate tops 120% -- not a bad number, and it's even better for larger customers. Customers spending at least $5,000 annually have an average net retention rate above 130%, and for those spending over $50,000 annually, it's above 145%.
The company's next earnings report will come in early June, at which point investors will be able to see if its growth is slowing down in the face of economic uncertainty. There's been no sign of that so far, and the stickiness of Asana's platform makes it unlikely that heavy users will drop the platform.
Growth has been the watchword of the stock market for the past couple of years, but that's changing. With interest rates rising and inflation running hot, investors are starting to care more about current profits and reasonable valuations. In those two areas, Asana has some real problems.
Under generally accepted accounting principles (GAAP), Asana reported a net loss of $288.3 million on revenue of $378.4 million in its fiscal 2022, and its free cash flow was also deeply negative. The company's gross margin is extremely high, but it has been spending excessively on sales and R&D.
Though the stock is down nearly 33% in April and down nearly 85% since it peaked late last year, its price-to-sales ratio is still around 10.
Now what
Asana is in a tough spot. Even if it can maintain its sky-high growth rate, Wall Street's sell-off in growth stocks has been relentless. Unless Asana knocks it out of the park with its next earnings report, the stock will likely remain under pressure. In the longer run, management needs to figure out how to turn a profit.
If Asana reports meaningfully slowing growth for its fiscal first quarter, or if its guidance next month anticipates a slowdown, the stock's still-high valuation will do it no favors. It doesn't matter that Asana has already declined by 85%. Another steep decline is certainly possible if the growth story starts to unravel.
