To The Moon

Investment Thesis

Asana (NYSE:ASAN) shares are soaring rapidly premarket. Investors have latched onto that Asana's CEO is resolute that the company is undervalued and is once again putting his money where his mouth is.

But from where I stand, I don'tsee much value here. Note, I was bullish on this stock as we headed into the earnings print.

Author rating

I had a contrarian call on this stock when few others would even consider the name. But with the share price now at $22, I'm calling this a hold.

Co-Founder and CEO Dustin Moskovitz Buys Shares More Shares

Moskovitz to purchase up to30 million shares of Asana. Depending on the price that these shares are bought at, this could mean that Moskovitz could be buying up somewhere north of $700 million worth of stock.

Incidentally, recall that Moskovitz bought $350million worth of Asana stock together with its Q2 2023 results. And this didn't stop its share price from sliding from about $28 per share all the way down to under $12 per share several months later.

To put it another way, the share price got cut by more than 50% in 5 months, after Moskovitz showed that he was ''serious'' about Asana's long-term prospects being undervalued.

Revenue Growth Rates Decelerate

ASAN revenue growth rates

Asana's guidance points to entering fiscal 2024 with Q1 2024 growing somewhere in the ballpark of sub-30 % growth. That's fair enough when you consider just how challenging the economy is right now, plus that in Q1 of last year, Asana had that really tough comparable to go against.

But what I find interesting, is for the subsequent quarters, which are much easier quarterly comparables, the full-year guidance would imply that there's further deceleration.

Could Asana's fiscal Q4 2024 end up growing less than 20% y/y? Is that a suitable exit rate for Asana?

Even if Asana was lowballing its full-year guidance, I suspect that thinking of Asana's exit rate from fiscal Q4 2024 at 20% or lower, is the correct ballpark in actuality.

What's more, consider Asana's revenue surprise history.

SA Premium

The days when Asana was ''easily'' clearing analysts' expectations with high single-digit beats are now in the rearview mirror.

In sum, I believe that what you see is really what you get. Exit rates from fiscal Q4 2024 at less than 20% CAGR.

Note that a few weeks ago, when I put out abullish callon Asana's stock, I made the case that Asana would be growing at 20% to 25% in this upcoming fiscal 2024.This turned out to be inaccurate, as its growth rates are now expected to be slower than this.

Asana's Prospects Discussed

I strongly believe that the best indication of the long-term success of a business is how much customers value the product.

ASAN Q4 2023

As we stand right now, despite all the allure of the ongoing digital transformation, Asana's customer adoption rates for customers spending $5K annually or more is now sub-30% CAGR. I understand that Asana's whole enterprise is set up to cross-sell aggressively into its subscriber base and drive up its DBNRR.

But I don't see that as sustainable when there are so many other competitors with very similar offerings, for instance, consider the publicly listed monday.com (MNDY) and Smartsheet (SMAR), but there are countless others too.

Profitability Profile in Focus

Before we discuss Asana's free cash flow potential, let's first discuss Asana's SBC. SBC was up 26% y/y.

This is the slowest increase in SBC this year. And this surprises me, after all, with the share price yesterday trading at near all-time lows, the value of management's compensation package will have shriveled, so I would have expected SBC to be moving higher, not lower with time.

ASAN Q4 2023

Next, consider this, cash flows from operations were negative $31 million compared with negative $39 million in the prior year quarter. Is that a significant improvement? Perhaps it is, but the problem here is that when one is dealing with such small numbers, small changes can have the illusion of substantial progress.

Let's put it this way, as we look ahead to fiscal 2024, I suspect that Asana will burn through $50 to $100 million of free cash flow.

Meanwhile, keep in mind that Asana carries about $470 million of net cash. So there's enough cash on the balance sheet to withstand at least 4 more years of consistent cash burn at these levels before Asana once again runs out of cash.

That being said, this is what Asana said on its earningscall,

Despite the uncertainty with the macro environment, we have increased confidence in our ability to be free cash flow positive before the end of calendar 2024, while balancing growth and profitability.

Again reiterating the message that close followers of Asana will be intimate with, that over the next 12 to 15 months, Asana will be eyeing up free cash flow breakeven even.

ASAN, How to Value This?

Data by YCharts

Asana's multiple has fully compressed. At this juncture, nobody doubts this. The question that is outstanding is whether or not paying around 8x forward free cash flow (including the premarket pop) is worthwhile.

For my part, I'm not convinced that this stock is worth chasing higher. So, I'm calling it a successful contrarian call on the stock and calling it a day.

When investing you'll never call the top on a stock. So you can either be too early or too late. Recognizing that the game is to buy low and sell high, rather than calling tops, is the mark of a professional.

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