Asana's (ASAN 3.15%) stock price has dropped significantly since the end of 2021 for several reasons, including the broader sell-off of growth stocks. Investors expect growth companies to increase revenue rapidly in the hopes of these businesses turning profitable sooner than later. However, growth stocks have been under pressure throughout 2022, as many companies' revenue growth -- and in some cases, revenue itself -- fell off a cliff, while costs continued to escalate in an inflationary environment squeezing margins.
Investors, as a result, generally sold off growth stocks as they became more cautious about the outlook for the economy and individual businesses. For instance, Asana's stock dropped 82% in 2022. Yikes!
Although many investors anticipate global economic growth rebounding in 2024 and 2025 and are optimistic about the prospects for many other growth companies, most Street analysts have shown little enthusiasm for this company and rate it as a hold. Here's why I think they are right.
Some key metrics are going the wrong way
The crux of the matter is Asana is witnessing declining revenue growth, deterioration in revenue retention rate, unprofitability, and relatively high valuation.
The company reported first-quarter fiscal 2024 revenue of $152.4 million, up 26% over the previous year's comparable quarter -- a significant decline from prior years, as seen in the chart below.
Even worse, management projected second-quarter year-over-year revenue growth to decrease to only 17%. Additionally, analysts are likely irked to see Asana's dollar-based net retention rate (DBNRR) erode. Its DBNRR in the first quarter of fiscal 2023 was over 120% compared to 110% in fiscal 2024.
When a company's DBNRR decreases, its existing customers spend less on its products or services by reducing their usage, downgrading their plans, or canceling their subscriptions, potentially adversely affecting its growth, profitability, and valuation. In Asana's case, its CFO said during its latest earnings call, "Our dollar-based net retention rates were lower, driven by lower expansion and downgrades..." but the company didn't see many subscription cancellations in its largest accounts.
Asana started in 2008, so it is a company that has been around for a while. However, it is still relatively early in its growth stage. The company has yet to turn a profit consistently; it is still trying to grow its market share. We see in the chart below that it has been unprofitable since it went public in 2020.
ASAN Net Income (Quarterly) data by YCharts.
Last, Asana sells for a price-to-sales (P/S) ratio of 7.9. According to CSIMarket, the average P/S ratio for the software and programming industry is 5.05. So, investors could be overvaluing the stock compared to the software industry, especially considering its lackluster fundamentals.
There are reasons to hold instead of selling
There are several compelling reasons to consider holding Asana if you're deliberating whether to sell or hold on to the stock.
First, Asana has a solid customer base of paying customers. It grew customers spending over $5,000 by 19% year over year to 19,864 as of April 30, 2023. These customers represented 73% of revenue, compared to the previous year's 70%. Even more impressive, it grew customers spending over $100,000 by 31% year over year to 510. These numbers indicate a growing and loyal following and a solid foundation for future growth.
Second, it consistently expands its product portfolio, which will likely entice new customers and drive increased revenue.
Third, the company is led by a proven, capable management team, which gives it significant potential for future growth. Asana's founders, Dustin Moskovitz and Justin Rosenstein, worked at Facebook before starting the company. Moskovitz was one of the co-founders of Facebook, and Rosenstein was a product manager at Facebook. Today, Moskovitz serves as Asana's CEO, and Rosenstein serves on its board.
Although unprofitable, the losses have been shrinking in recent quarters, and the company is on track to become profitable. It starts with an above-average gross margin of 90.3%.
ASAN Gross Profit Margin (Quarterly) data by YCharts.
A gross margin of 90% means that Asana keeps 90% of its revenue after accounting for the costs of the products sold. It uses this cash to run day-to-day operations, invest in research and development, cover marketing and other expenses. In short, a high gross margin gives it a head start for bottom-line profitability because the company has more money to cover its operating expenses and make a profit.
Moving down the income statement, the company has shown a 30% increase in its non-GAAP operating loss margin in the first quarter compared to last year. Non-GAAP refers to financial measures not calculated following generally accepted accounting principles (GAAP), a set of accounting standards companies use to report their financial results. A company might use non-GAAP measures to exclude certain one-time charges or gains from its reported earnings, helping investors see a more consistent company performance.
An increasing operating margin shows that the company has become more disciplined in spending. If the company continues improving its operating margins, it could eventually lead to bottom-line profitability.
What Asana bulls are betting on is that revenue growth will re-accelerate after the economy improves -- and management will remain disciplined in spending, leading to a rising profit and stock price.
Competition could make achieving its plans difficult
Heavy competition is one of Asana's most significant challenges as it seeks to achieve profitability.
Asana provides project management tools that compete with other popular tools from companies such as Atlassian and Monday.com.
Atlassian is a tough competitor, as it has been around for over 20 years, while Asana is about 15 years old. This gives Atlassian a longer track record of success, a more extensive customer base, and a broader product portfolio.
Monday.com is also a formidable competitor to Asana. Monday.com is known for its visual interface and ability to help teams manage their work more efficiently. Asana must differentiate itself from these competitors to attract new customers and grow its revenue -- a difficult task.
If you already own the stock, it may be worth holding. But if you are looking for a good growth investment, there might be better options.
