Asana Just Surprised Wall Street, but Is Buying Shares Now a Mistake?

Stock prices move every day for a host of reasons, but when a company announces its latest quarterly results, investors get a trove of financial information that can help them understand if it's on track. What they can't necessarily know, however, is whether any given quarter's results are part of a trend or just outliers.

Investors may be wondering that very thing about the numbers that work productivity software company Asana (ASAN -4.08%) delivered this month. Its results for its fiscal 2023 fourth quarter, which ended Jan. 31, sent the stock soaring by nearly 19%. Even after that pop, shares are still trading down more than 50% from their 12-month high. Let's take a closer look at the last quarter's results to see if they suggest that the stock is a buy now.

Making progress on the bottom line

Asana caught the attention of investors because of its revenue and customer growth, which have been outstanding for the entire time the company has been public. However, it has also been unprofitable and burning cash. Those negatives were easier for investors to ignore while interest rates were near zero and the market was booming, but over the last several quarters, the market has been more critical. Asana's increasing operating losses and lack of progress toward profitability likely contributed to the stock's fall.

Asana's Q4 2023 results caught investors' attention as they featured its biggest move yet toward profitability, though it still fell short of turning a positive result. On a non-GAAP basis, its operating loss, net loss, and loss per share all improved year-over-year for the first time in more than a year.

Data source: Asana.

To be clear, investors want these results to turn positive, but this quarter represented its biggest step toward non-GAAP profitability in quite a while. It also continued a trend, as Q4 represented the second quarter in a row that these metrics improved.

On a GAAP basis, Asana is seeing a similar trend, with its operating loss, net loss, and net loss per share also trending toward profitability over the past two quarters.

Revenue and customer growth are strong, but slowing

As encouraging as the slow march toward profitability has been to witness, there are some other trends worth keeping an eye on. Year-over-year revenue growth in the quarter came in at 34%, which was strong. However, it was the seventh straight quarter that this metric slowed. What investors need to know is if this trend will continue or level off at some point.

There's a similar story playing out with its customer metrics. Consider these year-over-year growth rates.

Data source: Asana.YOY = Year over year.

There's one more metric that Asana reports that is showing a similar trend. The number of customers spending $100,000 or more with it on an annualized basis grew by 49% in fiscal Q4, and while it did not report that metric in the prior-year period, it grew by 78% and 105%, respectively, in the third and second quarters of fiscal 2023. 

Existing customers are also starting to slow their rate of spending with Asana. Its dollar-based net retention rate, which measures how much more its average customer is spending compared to the prior-year period, was 115% in fiscal Q4 2023, down from 120% in fiscal Q4 2022.

The bottom line for investors

For its entire time as a publicly traded company, the story of Asana has featured strong top-line and revenue growth, and the key question for investors has been when it would be able to make the turn toward profitability. It seems like it has started to answer that question.

For fiscal 2024, Asana is guiding for significant improvements in the non-GAAP profitability metrics mentioned above. Management expects a non-GAAP operating loss of $125 million at the midpoint. That would be a noteworthy improvement over its fiscal 2023 loss of $207 million. Net loss per share is expected to be approximately $0.57, compared to a loss of $1.04 in fiscal 2023. 

Investors who have been on the sidelines may see these positive trends as reasons to buy shares now, and doing so may be a sound strategy. However, if the business continues to struggle with costs due to the macroeconomic environment, there's a chance that revenue and customer growth will underperform the company's expectations, making its profitability targets harder to reach. With that in mind, taking a wait-and-see approach with this stock could also make sense.