Asana: Strong Growth, Still Not Fully Priced

Summary

• Revenue growth rates are very enticing for this coordination SaaS platform.
• Arguably, the single biggest blemish on this company is its very poor profitability profile.
• On balance, I don't think the stock is fully priced. I argue that relative to the rest of the opportunities in the space, this stock is still attractive.
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Investment Thesis

Asana (NYSE:ASAN) is the new-ish kid on the block. This collaboration suite is expected to grow its top-line at 35% to 40% y/y into fiscal 2022 (finishing Jan. 2022).

Meanwhile, its guidance for Q4 2021 is pointing towards negative $40 million of non-GAAP operating income to grow its top line just $63 million. Having said that, I note that its non-GAAP gross profit margins of 88% are high enough to allow for improved growth and profit balance if Asana desired.

Given that the stock is still priced for just 16x next year's revenues, I proclaim this investment is worthwhile considering. Here's why:

What is Asana? And Why Now?

Asana is a coordination application, project, and portfolio management. It does away with cumbersome ways of managing workflow. It's a work management platform that addresses the pain of coordinating work.

Asana's TAM is estimated to reach $32 billion by 2023. Given that the company is guiding toward $213 million in revenues for fiscal 2021, this implies it has penetrated less than 1% of its TAM.

The company's goal is to grow its enterprise opportunity and make the task of organizing a team a rewarding experience.

Asana is attempting to answer who is doing what by when. That's the company's main goal. To bring a way of answering those simple questions to the 2020s.

Asana argues that it goes deeper than just being a simple collaboration platform, but more specifically a coordination application. For companies that wish to have clarity on who is doing what, so that more time can actually be spent on the work itself.

To this end, we have to note that despite sounding buzz-words-heavy, it also has tangible numbers to back up this narrative:

(Source)

Above, we can see that the percentage of customers spending $5K or more on an annualized basis was 58% year-over-year.

For anyone that has had to sieve through emails to understand who is responsible for completing what task is likely to resonate strongly with Asana's toolkit.

Accordingly, back in Q3 2020, the number of customers spending $5K or more was 5,648 while as of Q3 2021, the number of customers spending $5K or more had jumped by 58% y/y to 8,938 customers.

Revenue Growth Rates are Highly Compelling

Source: Author's work; using high-end company guidance

There's no question that Asana has a strong history of growing at a fast pace. What I do question is what is Asana's more sustainable growth rates? Given that pre-COVID the company was growing its top line at plus 70% y/y, and that in the post-COVID environment we have seen material deceleration to its revenue growth rates, I'm unsure of what is a sustainable growth rate for Asana? What's it likely to stabilize at in fiscal 2022?

What we do know is that Asana charges that COVID was a headwind for the company which led to an elevated churn rate. And now, Asana finds itself benefiting from the world's digital acceleration.

While that may be so, this still doesn't look all that inspiring, and investors are not likely to be overly welcoming if fiscal 2022 ends up growing at just 30% y/y.

What the Market is Missing?

When I look at Asana just after its Q3 2020 results, I was unimpressed with its profitability profile. I noted then, that for Q3 2020 its non-GAAP operating margins were negative 63%. Further, according to its own best-case scenario guidance ahead for Q4 2020 points towards negative 57%.

Again, this is a non-GAAP figure, which means all those pesky one-off costs are already added back, including stock-based comp and listing costs. What you see is all there is.

Having said that, what I didn't give enough consideration to on my first study of its earnings call back in December was its impressive gross profit margins, which reached 88% in Q3 2021. This is largely consistent with the 86% non-GAAP gross profit in the same period a year ago, emphasizing that there was nothing too abnormal in these gross margin profile.

The reason why I'm considering going long this stock is that I'm hopeful that as Asana is able to continue to grow its top line and that it may stabilize its losses on the bottom line.

Having finished Q3 2021 with non-GAAP operating losses of $37 million, its guidance points towards approximately 45% y/y growth rates, while its non-GAAP operating loss is pointing towards close to $40 million.

Obviously, given that its revenues are only pointing towards $63 million at the top end, for Asana to incur $40 million in non-GAAP losses, doesn't strike one as particularly enticing. However, I'm assuming that a large part of these losses is down to the customer onboarding experience and that as customers remain on the platform, the business may get some positive leverage working in its favor.

Obviously, this is a heroic assumption on my part - even wishful thinking, if you will. However, I don't believe that I'm paying too heroic a multiple for the stock, as you can see.

Valuation - Still Attractively Priced, For Now

If we take its 158 million shares outstanding for Q4 2021, this implies that its market cap is $4.8 billion. We know that Asana's revenues are expected to finish fiscal 2021 with $222 million in revenues. Assuming that its revenue growth rates decelerate in fiscal 2022, this could translate into 35% growth rates next year, at which point its revenues would finish at $297 million.

In other words, its market cap is trading at roughly 16x forward sales.

If we compare with Atlassian (TEAM) which trades for about 28x forward sales, although that company has its year-end in June 2022. Also, I believe that Slack (WORK) is a good comparison, as that is being acquired at roughly 21x next year's growth rate.

In any case, investors following this space will know that there aren't many SaaS stocks left growing at anywhere north of 30% y/y still priced at sub 20x forward sales.

The Bottom Line

This productivity SaaS enterprise is cheaply valued relative to its peers. Furthermore, it has incredibly high gross profit margins. The one aspect which kept me away before had been Asana's horrible non-GAAP operating profit margins, but I believe that the market may be willing to give this company the benefit of the doubt.

With all the above in mind, I suspect this investment is positively enticing.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ASAN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.