ASAN - Asana: Substantial Confidence In A Rebound

2023-04-08 04:33:20 ET

Summary

• Shares of Asana have rebounded nearly 50% this year, in sympathy with other tech stocks.
• The company is expecting growth to slow to the high teens in FY24, though it has a history of guiding conservatively.
• Asana has among the highest gross margins in the industry, clocking in above 90%.
• Still trading at ~5x forward revenue amid a large CEO purchase of shares, Asana has plenty of room to rebound higher.

With bond yields and interest rates rising, it makes sense that investors are cooling the brakes on highly valued tech stocks. 2023 so far has already seen a sharp comeback in many beaten-down tech names, but with careful stock selection we still find many attractive names to buy that offer worthwhile risk premiums.

Asana ( ASAN ), in my view, is one such trade. This work management and collaboration software company has been on a roller coaster, falling sharply in 2022 before rebounding nearly 50% this year. After a recent very strong Q4 earnings print, however, I think there is still room for ASAN stock to rally higher.

I'm keeping Asana in my portfolio, though I am slightly tapering my recommendation on the stock from a prior strong buy to simply a buy, owing to the generosity of the stock's YTD rally and its relatively slimmer valuation safety net today.

Alongside Q4 earnings, which the company released in mid-March and which we'll go through in the next section, CEO Dustin Moskovitz (a co-founder of Facebook) also announced a sizable insider buy during his prepared remarks on the Q4 earnings call :

One thing I want to add to my formal comments is that I'm 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.

I'm doing this because I personally believe Asana shares are undervalued, given the scale of the opportunity I see in front of us. The work management market is an enormous underpenetrated market that I believe we're well positioned to lead, especially in enterprise. Working alongside some of the most strategic leaders in the respective industries gives us unique insights into their complex enterprise needs and various business models."

If Moskovitz executes the entirety of the 30 million share buy, this represents a nearly ~$600 million vote of confidence in the stock at current share prices (~15% of today's market cap). This also comes on top of another ~$350 million purchase from Moskovitz in September at roughly $18 per share.

On top of these generous insider buys, here is what I consider to be the long-term bull case for Asana:

• Asana's long-term demand will be bolstered by the ongoing shift to remote and distributed teams. More and more companies are embracing a distributed working model, if not a fully remote one. With fewer in-person touchpoints, software tools become critical to keeping teams together and in sync.
• Massive global TAM. Asana believes it has a $51 billion TAM by 2025 and is applicable to the global base of ~1.25 billion information workers. By that metric, Asana's current user base represents only <5% of the global eligible workforce.
• Land and expand. Asana adopts the classic software go-to-market playbook, which is to prove its concept and value with smaller teams at first, but eventually expand to entire organizations and companies. Dollar-based net retention rates are clocking in above 140% for companies spending more than $100,000 annually on Asana, a leading indicator that Asana's traction among larger enterprises is growing.
• Huge gross margin profile. Asana's pro forma gross margins are in the ~90% range, making it one of the highest-margin software companies in the market. While the company isn't profitable today, that gross margin profile gives Asana plenty of leeway to scale profitably when it's larger, as nearly every dollar of incremental revenue flows through to the bottom line.

Stay long here.

Q4 download

Let's now cover Asana's latest Q4 results in greater detail. The Q4 earnings summary is shown below:

Asana grew its revenue at 34% y/y to $150.2 million in the fourth quarter, beating Wall Street's expectations of $145.1 million (+30% y/y) by a four-point margin. Note as well that Asana shares had pulled back in December because the company guided to a 30% y/y growth (representing a sharp deceleration from 41% y/y growth in Q3), but eventually came out ahead.

Note as well that currency headwinds continue to be a factor dragging down Asana's reported growth rates. Slightly over a third of Asana's revenue is overseas, for which the stronger dollar has a negative translation impact; on a constant-currency basis, Asana's growth would have clocked in one point higher at 35% y/y.

While management cited macro headwinds similar to other software companies, Asana still managed to land new customers and instill operational improvements in its go-to-market teams. Per CFO Anne Raymond's remarks on the Q4 earnings call :

The macro headwinds continue to impact our expansions and created longer sales cycle in Q4, and will continue to impact us going into fiscal year 2024. Top of funnel demand remained stable in the fourth quarter. Our free-to-pay conversion rate was also stable and helped feed our total customer number.

We added 4,000 customers in Q4, consistent with the previous quarter. The softness in Q4 was somewhat offset by overachievement in our enterprise and strategic accounts. Our largest customers really tell the story of the kind of value and ROI Asana delivers and how much potential opportunity there is in the market.

We have invested heavily in our enterprise products over the years, and we will further build our organizational go-to-market muscle in fiscal year '24 for the growth opportunity ahead. We expect to see those investments fully materialize by the end of this year."

The company's already-high gross margins also ticked up 50bps y/y and 90bps sequentially to 90.5%:

Asana also improved its pro forma operating margins by fourteen points to -25%, versus -39% in the prior-year Q4 as well as a substantial sequential improvement versus -37% in Q3. The company believes that this positive trajectory in operating margin improvement will continue through 2024, owing to a goal to improve sales productivity per rep by 20% and other efficiency initiatives.

Valuation and key takeaways

At current share prices near $19, Asana trades at a market cap of $4.16 billion. After we net off the $529.1 million of cash and $46.7 million of debt on Asana's most recent balance sheet, the company's resulting enterprise value is $3.68 billion.

Meanwhile, for the upcoming fiscal year FY24 (the year for Asana ending in January 2024), the company is forecasting $638-$648 million in revenue, representing 17-18% y/y growth. This clearly implies stark declaration from Q4 exiting growth rates of 34% y/y - and while the softer macro will certainly have an impact on full-year growth, we do note that Asana has a history of guiding conservatively.

Nevertheless, taking management's outlook at face value, Asana trades at 5.7x EV/FY24 revenue - which to me is quite conservative for a company that is still growing north of >30% y/y with no current evidence for sharp deceleration to the mid-teens.

In my view, especially on the back of aggressive CEO purchases, there is plenty of room for Asana to rebound higher.

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