ASAN - Asana: A Surprising Generative AI Winner Insider Buying From 50% Shareholder

2023-06-14 05:12:00 ET

Summary

• Asana is one of the few tech companies to quickly integrate generative AI into their product suites.
• Management has reiterated guidance for cash flow breakeven by the end of this year.
• The company has a net cash balance sheet and remains a secular growth story.
• The stock remains buyable, and I note that the CEO is buying stock on the open market.

Asana ( ASAN ) has been one of the hottest stocks in the market as of late. Besides making the pivot for cash flow breakeven by the end of this year, ASAN has also demonstrated its ability to quickly integrate generative AI into its products. Moreover, the CEO has resumed his streak of insider buying this year in spite of already owning 50% of shares outstanding. ASAN has a net cash balance sheet and the stock is still reasonably valued. The stock has run up heavily in just a matter of weeks, but both momentum - and fundamentals - are supporting this rise.

ASAN Stock Price

The tech bear market may finally be over. Sure, ASAN is nowhere near all-time highs, but after a recent rally, the stock is close to 52-week highs.

I last covered ASAN in April, where I rated the stock a buy on account of the high insider ownership and plans by the CEO to increase his stake further. Even I underestimated how much of an impact generative AI would have on the business and stock price.

ASAN Stock Key Metrics

In its most recent quarter, ASAN generated 26% YOY revenue growth to $152 million, beating management guidance for up to $151 million.

As usual, ASAN saw the strongest growth from its largest customers, with its dollar based net retention rate hovering over 130% for customers spending over $100k.

ASAN continued to see strong growth in these large customers, with customers spending over $100k growing 31% YOY to 510.

ASAN also made significant progress on profitability, with its non-GAAP operating loss margin coming in at 15%, a big improvement from the 45% loss margin in the prior year. ASAN ended the quarter with $523 million of cash versus $46 million of debt - at this point, the company has more than enough cash to fund ongoing operating losses for many years (though management is still guiding for cash flow breakeven by the end of this year).

Looking forward, management reiterated their full-year revenue guide, but slightly improved upon their non-GAAP operating loss guidance from $130 million down to $120 million.

On the conference call , management cited an improved operating environment, noting that “top-of-funnel demand and our free-to-paid conversion rate remained steady in the first quarter.” Management noted that they have already used generative AI to boost operational efficiency - citing an example of using “AI voices to generate international voiceovers.” This helped accelerate go-to-market timelines as well as reducing their creative production budget. There are still some unknowns for how generative AI may directly impact their financials, but management is of the view that they will be able to adjust their pricing model accordingly as they provide more value for customers.

Is ASAN Stock A Buy, Sell, or Hold?

ASAN is an enterprise tech company helping its customers increase organization and productivity of projects.

Collaborate work management tools is a highly competitive field, but ASAN appears to have gained traction, as evidenced by the sustained strong growth at its largest customers.

I am impressed by how quickly ASAN has been able to integrate generative AI into their products. ASAN has already identified several use cases for generative AI, including helping to identify teams that are falling behind and in need of resource reallocation.

ASAN has also integrated generative AI to help write instant summaries and serve as a writing assistant for employees.

Wall Street has taken notice. ASAN for much of the past year traded at deeply discounted valuations but has since traded up to a more healthy 7.6x sales.

If ASAN can re-accelerate revenue growth to the 20% range, generate 30% long term net margins, and trade at a 1.5x price to earnings growth ratio (‘PEG ratio’), then I could see ASAN trading at 9x sales, suggesting some potential upside.

It is worth noting that CEO Moskovitz is a former co-founder of Facebook ( META ) and owns over 50% of fully diluted shares outstanding.

CEO Moskovitz previously stated intentions to enter a 10b5-1 trading plan to “purchase up to 30 million shares of our Class A common stock.” It appears that the insider buying program has finally started, with CEO Moskovitz purchasing 160,000 shares for $22.65 each in early June .

What are the key risks? Two risks standout: valuation and competition. While ASAN is not obviously expensive, it must be noted that the recent rally is pricing in a great deal of optimism. In reality, it is unclear exactly how much generative AI can accelerate revenue growth rates, if at all. ASAN can work towards justifying the valuation by executing on plans to reach cash flow breakeven by the end of this year, but in truth one must wonder why the stock trades so much more richly than something like SentinelOne ( S ). I mentioned earlier that ASAN operates in a highly competitive field. It is unclear if generative AI can make ASAN more competitive relative to peers, as I assume that its peers are also working towards integrating generative AI into their own offerings. It is possible that AI has created a sort of mini-bubble. Due to ASAN having risen for the most part due to AI enthusiasm, I wouldn’t be surprised if the stock falls upon the bursting of this mini-bubble. I reiterate my buy rating as I expect the company to show improving fundamentals due to its generative AI integrations and CEO Moskovitz's unusual support should add upward pressure to the stock price.

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