Asana posts a strong result, what you should consider before buying the stock?

Key intro points for Asana:

-Revenue came in at $126 million, increasing by 57% year over year.

-Company had 126,000 paying customers at the end of the quarter

-Number of customers spending over $5000 grew by 48% year over year, to 16,689.

-The number of customers spending over $50,000 increased by 102% year over year.

-GAAP net income came in at a loss of $60.7 million

Asana's NYSE: ASAN revenue and earnings came in strong again, as the workflow solutions company continued to expand operations at a rapid pace. Despite continuing to post strong results, the stock is down along with the rest of the tech industry by over 84%, from its 52-week high. Despite the recent sell-off, investors may be interested in the stock again, as valuations become more reasonable relative to historical levels. But, the company has continued to witness increased losses, which remains a concern for investors who may be looking to buy the stock.

Asana’s stock has sold off due to a number of factors, firstly the global monetary tightening has affected valuations across the tech industry, with a number of tech equities coming down due to a broader correction. Secondly, Asana’s valuations were expensive relative to future revenue and cash flow.

A quick summary of Asana’s operations:

Asana continues to be one of the most competitive workflow/productivity software on the market today.  It competes with the likes of Trello and Monday in providing various productivity tools. Asana is primarily preferred by those who wish to collaborate with multiple people or are a part of an organization versus its competitors, which offer better tools for individual users. Furthermore, with hybrid work becoming the happy medium between remote and being on-site full-time, Asana should continue to pick up customers in the future.

Asana’s primary focus has been on large organizations as it looks to target corporate accounts, compared to its competitors who have focused on a wider range of tools for both individuals and organizations, with a strategy primarily focused on high margins, and retaining its clientele. In fact, Asana’s dollar-based retention rate for the quarter was over 120%.

Asana has continued to add customers to its main market, which is North America, as it continued to bring on key customers onto its platform.

Asana operates in over 190 countries and has been increasingly looking to expand globally beyond the U.S. market in order to continue its high rate of growth, with a particular focus on European and Asian markets. It has teamed up with multiple large companies to provide workflow services. Both these markets offer strong opportunities, especially in Asia, where growth remains strong relative to North America and Europe.

The global addressable market for Asana remains around $20 billion and is expected to grow at a CAGR (cumulative average growth rate), of around 30%, to get to a TAM (total- addressable- market), of around $50 billion. It remains to be seen whether Asana can increase its market share during this time, as competition remains fierce, and other than network effects, Asana’s competitive advantage remains relatively low. Regardless, growth should remain robust during the 4-5 years.

A quick overview of Asana’s financials:

Asana’s gross margins remain healthy at 90%, but the company continued to post an operating loss during the quarter. The biggest factors playing into Asana’s operating loss, which came in at $96 million, are its research & development spend and its sales & marketing budget. Asana continues to see higher outlays due to the fact that the industry remains a competitive one with low barriers to entry, and with multiple competitors vying for market share, Asana will have to continue to witness high levels of operating costs for the foreseeable future as it looks to continue to maintain its market position. Profitability concerns remain one of the biggest concerns for investors.

Key points from management during the quarter:

Management continued to re-iterate the strong revenue growth and the retention rate, but warned costs are unlikely to come down anytime soon. Management also pointed out that Asana continues to integrate its platform with Box, Google, and other similar application, so that it can help organizations with a seamless experience. Overall, management continues to execute its plan, but investors will continue to wait and watch.

Is this a good entry point for Asana?

Asana’s valuations have come down significantly, from their previous highs, but the stock still trades at a relatively expensive valuation, and with a price-to-sales (P/S), of 10x the stock can’t be considered cheap. Another question is whether future profit margins would justify the currently lofty valuations? Asana continues to grow at a rapid pace, but with all its issues, investors may wait on the sidelines a little while longer. It remains to be seen whether the stock has hit its lows and with market headwinds, uncertainty is a big factor around the stock.