ASAN - Asana: CEO Owns 50% Of Shares And Plans To Buy Even More

2023-04-16 07:49:13 ET

Summary

• Asana has seen the tough macro environment impact its near-term revenue growth rates.
• The company in turn has made big progress on profitability and anticipates further margin expansion this year.
• The company has net cash on the balance sheet.
• ASAN stock continues to look buyable on account of the artificial buying pressure ahead.

Asana ( ASAN ) has performed very strongly year to date as it benefitted from some recovery in the broader tech sector. ASAN has seen the tough macro environment take its toll on its revenue growth rates but continues to outline a clear path to profitability. The valuation remains undemanding even before accounting for the net cash on the balance sheet and the company benefits from its close association with former Facebook co-founder Dustin Moskovitz. CEO Moskovitz has indicated intentions to purchase up to 30 million shares over the coming year - representing over 13% of diluted shares outstanding and adding to his already-outsized position in the company. I see further upside for ASAN stock for long term investors.

ASAN Stock Price

It may be hard to believe, but ASAN stock once traded near $140 per share.

ASAN is up 38% year to date but remains down 45% over the past year. I last covered ASAN in February, where I rated the stock a buy on account of the large net cash position. The stock has since returned 10% due to increasing confidence in the company’s path to profitability.

ASAN Stock Key Metrics

In its most recent quarter, ASAN grew revenue by 34% YOY to $150 million. That closed out a year in which revenue grew by 45%.

While ASAN saw its dollar-based net retention rate dip to 115% on a trailing twelve-month basis, it continued to see strong retention rates among its largest customers.

That has been an important driver in the bullish thesis as ASAN has seen its strongest customer growth from larger customers.

ASAN ended the quarter with $529 million of cash versus $46.7 million in debt, representing a solid balance sheet position. That represents enough cash to sustain over 4 years of cash flow losses, even without any improvements in margins.

Looking ahead, management’s guidance shows material impact from the tough macro environment. Management expects the first quarter of fiscal 2024 to see revenue growth of up to 25% - a steep deceleration from the 34% number just reported in the recent quarter. Management expects full-year revenue growth to show even more deceleration, with just 18% projected growth. Management, however, also expects its non-GAAP operating margin to improve by 19 percentage points for the full year, which comes on top of the 14 percentage points of improvement shown in this past quarter. On the conference call , management noted that they expect their dollar-based net retention rates to trend even lower due to the macro environment. Yet management remained optimistic regarding the traction of their product due to the health of key customer accounts. Despite the macro headwinds, management noted that they have increased confidence in their ability to be free cash flow positive by the end of this fiscal year - I assume that their layoff of 9% of their workforce of the past year have something to do with that.

Is ASAN Stock A Buy, Sell, or Hold?

In a nutshell, ASAN boosts the productivity of its enterprise customers. ASAN helps its customers manage the productivity life cycle of its projects, including tracking individual project progress as well as larger, longer term initiatives.

ASAN estimates that its products help its customers operate more efficiently with happier employees.

ASAN stock recently traded hands at around 6x sales estimates for this upcoming year.

Assuming 20% revenue growth, 20% long term net margins, and a 1.5x price to earnings growth ratio (‘PEG ratio’), I could see ASAN trading at around 6x sales. Between the double-digit secular growth and conservative 1.5x PEG ratio assumption, that suggests moderate upside for the stock over the coming years.

Yet considering that ASAN remains some distance away from non-GAAP profitability, that valuation is somewhat stretched relative to peers. What might be the explanation for the valuation?

The answer appears to be due to CEO Moskovitz’ ever-increasing stake in the company. I previously highlighted that after funding an equity raise and various rounds of insider buying, CEO Moskovitz owns 50% of shares outstanding. Yet on this latest earnings call, CEO Moskovitz stated that he was “planning to enter into a 10b5-1 trading plan on March 9, 2023, to purchase up to 30 million shares of our Class A common stock, subject to the required cooling-off period.” That represents an additional 30% of shares outstanding that may be added to his stake. Besides the implied upward pressure from those ongoing purchases, the high stake seems to increase the likelihood of a proposed takeover in the future, even though I find such an event to be unlikely.

What are the key risks? Because ASAN trades at a relative premium to peers, the stock may be subject to increased volatility especially in the event of another downturn in the tech sector. I can see ASAN trading as much as 35% lower just to trade in-line with peers based on its forward growth rate, though my view is that the stock price may benefit from artificial upward pressure due to the low float and active buyer in CEO Moskovitz. The bigger risk might be due to competition. Productivity management is a highly competitive field including the likes of Atlassian ( TEAM ) and monday.com ( MNDY ). It may not be so easy to win existing customers from the competition as companies might not want to re-educate their employees on new productivity software. It is possible that the current depressed revenue growth rates represent the new normal instead of near term headwinds and that growth never accelerates again. While I continue to rate ASAN a buy, I note that it is trading at the upper end of my valuation range and there are undoubtedly cheaper bargains to be had elsewhere in the tech sector.

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