Software company Asana (ASAN -1.31%) has fallen 92% from its all-time high as the market punishes companies that aren't generating any income. High growth is no longer enough; there has to be a plan to become profitable, and investors are questioning whether Asana can get there.
But this company is growing much more quickly than a lot of other tech stocks, and it may be able to grow out of the current financial hole it's in. I'm looking at Asana's risk versus reward to see if the company is a buy now.
Financials from top to bottom
Asana's financial position will set some groundwork for how to look at the stock. In the third quarter of fiscal 2023, Asana saw a 41% increase in revenues to $141.4 million. However, the company also saw an increase in its operating loss, with a GAAP operating loss of $101.1 million, or 71% of revenues, compared to a $68.1 million loss for the same period a year ago. The non-GAAP operating loss was $52.6 million, or 37% of revenues.
Asana also saw a net loss of $100.9 million and a non-GAAP net loss of $52.4 million. Cash flow from operating activities was negative $46.2 million and a negative free cash flow of $48.5 million.
Cash burn is a concern, but investors also have to look at how impressive Asana's growth stats are. Asana saw a 32% increase in the number of customers spending $5,000 or more on an annualized basis and a 52% increase in revenues from these customers. The number of customers spending $100,000 or more annually also increased by 78%. The overall dollar-based net retention rate was over 120%, with rates of over 128% and 140% for customers spending $5,000 or more and $100,000 or more, respectively.
No matter what you think of Asana, its growth is impressive. The problem is that top-line growth hasn't translated to bottom-line profitability.
Image source: Getty Images.
Looking forward for Asana
Management said in the most recent conference call that they expected to get to free cash flow positive by the end of calendar 2024. That's more than two years from now, and Asana has a big hole to fill in operations.
But there are signs that Asana could improve financials quickly. Management said big customers are sticking with Asana, despite slower adoption from smaller organizations. That means the sales funnel isn't filling the way they might hope, but big companies are where the money is made, so revenue and margins could hold up well next year.
Asana now has a HIPAA-compliant product, and that allows it to move into healthcare. Companies are using Asana across partner organizations, which shows its ease of use.
There was also a 9% reduction in global headcount, which won't start showing in financial results until next quarter at the earliest. The company is heading in the right direction, but it has a very tall hill to climb given the scale of current losses.
Balancing risk and reward
The hard truth is that Asana has to cut costs rapidly to be investable at all. Cutting 9% of headcount is a start, but that number likely needs to go up significantly in order to get to cash flow positive.
I will also note that Asana had high stock-based compensation of $48 million last quarter, which can be bad for a company but does help with cash burn. Above, I mentioned that the operating loss was $101.1 million, but the negative free cash flow was only $48.5 million. The difference is mostly stock-based compensation -- and with $545 million in cash on the balance sheet, there's likely a multi-year runway.
As risky as Asana is, I think it will survive the current market and either grow out of it, emerging as a company that acquires competitors to come out stronger, or end up getting sold to a larger company. In this case, the risk is worth the reward, so I'm staying invested in the stock and looking to buy more.
