Wall Street celebrated Asana's (ASAN -2.40%) recent earnings report for the fourth quarter of its 2023 fiscal year. Shares surged before a shaky market brought the stock back near pre-earnings levels.
Is this a buy-the-dip moment? Or should investors avoid the stock after it couldn't maintain its recent momentum? To answer, you must understand what could have spurred the market's excitement in the first place. Peel back the onion layers, and you'll get some clues.
What's the real reason shares rallied?
Asana is a collaboration software company. Enterprises can manage projects, assign tasks, and organize workflows through web and phone apps. More than 19,000 enterprises spend more than $5,000 annually on the platform. The company made $547 million in the fiscal year 2023, which it recently concluded with Q4 earnings.
The surface-level numbers were solid. Revenue beat analyst estimates by $5 million, and earnings per share (EPS) came in $0.15 better than expected. For the full year, Asana's revenue grew 45% year over year. The company isn't profitable now; non-GAAP EPS was minus $1.04, and free cash flow was minus $159 million. Perhaps Wall Street had low expectations, and investors were pleasantly surprised by Asana's year-end results.
More likely, investors are excited over a massive insider buying program that multi-billionaire founder and CEO Dustin Moskovitz initiated. Moskovitz has already purchased large amounts of Asana's stock and will purchase another 30 million shares. That could reduce outstanding shares by 14%, making remaining shares worth a larger piece of the business.
Looking at the other side of the coin
But a company's outstanding shares can go both ways. Sometimes, a business can pay employees with company shares. This can conserve cash (avoiding huge cash salaries), which is especially useful for young companies that aren't profitable yet. Management can also sell new shares to the market to raise money when their cash runs low.
But creating too many new shares can hurt shareholders. More shares decrease the value of existing shares because they represent less of a company's revenue or profits. In Asana's case, outstanding shares have increased by about 40% since the IPO.
You can see below how revenue-per-share growth slows as outstanding shares increase.
ASAN Revenue (TTM) data by YCharts
Asana has issued $189 million in stock-based compensation over the past year, roughly 34% of revenue. At the current share price, that's roughly 9.8 million shares. Yes, Moskovitz's planned purchases are much larger, but it's something to keep an eye on. A great company can be a mediocre investment if too much dilution occurs.
Is Asana stock a buy now?
Moskovitz believes Asana's valuation and growth opportunities remain attractive, according to comments on the Q4 earnings call. Down 85% from their high, shares trade at a price-to-sales ratio (P/S) of 7.6, near its lowest since IPO. Meanwhile, analysts predict double-digit revenue growth for the next several years, so Moskovitz might be on to something.
ASAN PS Ratio data by YCharts
However, investors can't ignore Asana's large amounts of stock-based compensation just because Moskovitz buys shares. Investors should base their investments on the company's fundamentals, which must improve. One can applaud Moskovitz for putting his money where his mouth is. Given the stock's significant decline, now's not a bad time to consider shares -- but buy shares because you believe in the business, not just because Moskovitz does.
