ASAN - Asana Q2 Earnings Preview: Valuation Concerns In Focus

2023-08-30 14:44:52 ET

Summary

• Asana, Inc.'s upcoming fiscal Q2 2024 report leaves me uncertain due to its slowing growth and shifting narrative.
• The company's mission revolves around streamlining work and improving productivity through its platform.
• Asana's valuation, despite its strong balance sheet, poses questions, considering its decelerating growth and ongoing losses.

Investment Thesis

Asana, Inc. ( ASAN ), one of the key battleground stocks, is about to report its fiscal Q2 2024 results next Tuesday, September 5th, after hours. Here I discuss what investors should be aware of.

Bears will be quick to remark that Asana's growth rates are slowing down and that this business can't be counted on to deliver the +30% CAGR as it once did. Accordingly, investors will no longer be inclined to support its alluring tales of ''work works better with Asana'' and start to clamor for stronger profitability.

Whereas bulls will point out that Asana's balance sheet is rock-solid and the business has plenty of levers and time to improve its growth prospects.

For my part, I remain skeptical and neutral on this name.

What's Asana?

Asana is all about making work easier for teams. It's like the conductor of a symphony, helping orchestrate work from everyday tasks to big strategic projects. Customers use Asana to keep everything in check, whether it's launching a new product, running marketing campaigns, or setting organization-wide goals. Think of it as a tool that brings structure to the sometimes chaotic world of work. It helps teams see who's doing what, when, and ensures everyone knows their responsibilities. So, it's all about clarity, transparency, and accountability in organizations, from individual workers to team leaders and executives.

As for its value proposition, Asana's mission is to reduce the time spent on what they call "work about work." This means all those unnecessary meetings, long email threads, and confusing status updates that eat into productivity. By providing a system that captures and manages tasks, projects, milestones, portfolios, and goals, Asana helps teams streamline their work. It's not just about communication; it's about having a single, always-updated record that keeps everyone on the same page.

Asana's technology, known as the Asana Work Graph, is a key differentiator. It helps individuals and teams see their work in a way that makes sense to them while maintaining a central, up-to-date record of every task, project, and document.

Asana's peers included monday.com Ltd. ( MNDY ) and Atlassian ( TEAM ), as well as Slack, owned by Salesforce ( CRM ). But, for all intents and purposes, I believe that Atlassian and monday.com are closer competitors.

That being said, Asana is less customizable than either Team or monday.com. This can be a positive or a negative depending on the type of enterprise and IT proficiency of the customer base.

What to Look Out For?

I believe that when Asana reports its fiscal Q2 2024 results next week, it will not significantly raise its full-year fiscal 2024 guidance .

Meaning that what we see is what we get. This business can no longer be counted on for premium growth rates. This means a company that can be counted on for +20% of consistent CAGR.

To put my argument more simply, I believe that despite the easier comparables with H2 2023, Asana's growth rates for the second half of fiscal 2024 will imply that its revenue growth rates will be in the high teens. Consequently, the concern that Asana's operations are starting to mature will take place front and center in all investors' discussions. As a consequence, this means that investors will rapidly look beyond its revenue growth line towards its underlying profitability to support its valuation.

How to Think About Its Valuation?

In my opinion, investors are still being asked to pay a high premium for Asana. This is a business that the best it can offer investors is a path toward improved non-GAAP profitability.

However, the business is still expected to end fiscal 2024 reporting negative profitability. Although this is expected to improve further and end next year in positive territory.

With that in mind, why should investors be willing to pay 7x forward sales for a business that's reporting decelerating revenue growth rates plus a business that is clearly unprofitable, at least for now?

The one aspect of this investment thesis that is undoubtedly bullish is that Asana's balance sheet is mighty strong. Asana holds about $500 million of net cash and no significant debt. This means that CEO and founder Dustin Moskovitz and his team have plenty of time to figure out how they can stabilize their operations and cut a path towards not only improved profitability but alluring profitability .

The Bottom Line

Approaching Asana's fiscal Q2 2024 earnings report, uncertainty lingers. Bears argue that its once-strong growth is faltering, potentially putting an end to the "+30% CAGR" era. This skepticism shadows Asana's "work works better with Asana" narrative, raising demands for profitability. Bulls highlight the strong balance sheet but acknowledge the need to revive growth. Personally, I'm cautiously neutral.

Asana simplifies team collaboration, aiding clarity and accountability. However, its slowing growth, possibly signaling a shift to a high-teens CAGR, raises questions about justifying its premium valuation.

While its robust balance sheet provides stability, the challenge is to justify investors paying 7x forward sales for a company still reporting losses. The future for Asana, Inc. remains uncertain, with fiscal Q2 2024 results likely offering limited clarity.

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