Late on June 2, 2022, the work management platform developer, Asana Inc. (ASAN) posted earnings for the first quarter of fiscal 2023. The earnings were better than expected with nice growth across most metrics. On top of earnings and revenue surpassing estimates, customer growth kept a good momentum with over a 120% overall net retention rate. Despite this, investors were not happy with the company’s losses and investments. The company’s financials revealed that its main focus is customer growth rather than profitability. While customer growth indirectly does lead to an increase in revenue, the wider losses and no focus on them at times like these is something investors do not like.
Broader Environment & ASAN
The world is in chaos in 2022, and the stock market is even more so. Equities have had a harsh fall this year as the geopolitical and economic situation unfolds further. Russia-Ukraine conflict, China lockdowns, supply chain problems, soaring inflation, and the consequent interest rate hikes are taking a toll on economies as well as stock markets around the world. The U.S. inflation and interest rates have crossed 40-year levels and the economy is on the verge of a recession. The threat of a recession in the near term is becoming inevitable as the economic environment continues to deteriorate further.
ASAN has joined in on the broader downfall of equities and suffered even more severely as the tech sell-off has been even worse. Down nearly 70% just this year, the stock’s battered price while suggests a nice entry point, the company’s loss and cash burn have investors worried. Hence, in spite of the best results, the stock has only continued to plunge further. Following the results, ASAN declined by 12.1% in premarket trading, 6.64% in regular, and another 0.89% in the pre-market. The stock was then trading at a price of $22.66 per share at the end of the day.
ASAN’s Financial Situation
For the first quarter of fiscal 2023, ASAN posted revenues of $120.6 million which grew by 57% YOY. The revenues not only surpassed the company’s own expectations of $115 million but also the consensus estimate by 4.83%. However, investors and analysts were not really excited about the growth as it came against the prior quarter’s 64%.
The bottom line while coming above the expectations disappointed because the net loss was much wider than the comparable. Net loss for the quarter was $57.4 million against the year-ago $33.8 million. But the adjusted loss of 30 cents per share was narrower than the consensus estimate of 35 cents per share for the quarter. The main concern was management’s lack of attention to the net loss, as it is focused on customer growth. The company spent 80% of its revenue on sales and marketing in the quarter which resulted in a huge operating loss.
However, the focus on customers did results in an increase in totally paying customers to 126,000 from 119,000 at the end of the previous quarter. Customers spending $5000 or more on annualized basis rose by 48% YOY to 16,689 with revenues from them surging by 73%. The Dollar-based net retention rate for these customers was over 130%. Moreover, customers spending $50,000 or above increased by 102% YOY. And their net retention rate was more than 145% in the quarter against 125% in the previous.
For the Q2 fiscal 2023, the company said it is expecting a loss of 38-39 cents per share on revenues of $127.0-$128.0 million. The adjusted operating loss is pegged at $74-$72 million. The consensus estimate of loss per share for the quarter is at 37 cents, the midpoint of the company’s guidance.
Given the upbeat results for the first quarter, ASAN upgraded its full-year revenue guidance to $536-$540 million. This represents a YOY increase of 42-43%. Analysts were expecting growth of around 40% for this year and the next year’s revenue growth is expected to be 33.9%.
Therefore, another factor in the lesser interest of investors in ASAN is its growth deceleration as it grew revenues by 67% in the previous year. While the 30-40% YOY growth is still very good, it seems less in front of nearly 70%. But it is only plausible that the company would enter a more normalized growth rate and the wider economic situation only warrant a decline in the near term.
Given the wide adoption of its services and above 120% retention rate, ASAN’s tools are vital for all sized businesses including enterprises. In fact, the platform is being adopted much faster by enterprises as the hybrid/remote works trend is here to stay. So, the long-term growth prospects are bullish.
ASAN Stock Ratings
Following the latest earnings, a number of analysts cut their price target of the company. Oppenheimer’s target price for ASAN is now $40 against $60, JMP $43 against $68, and Baird $31 against $65. Piper Sandler’s new price target for the stock is $35 while the earlier one was $55.
Given the continued downfall of the stock, it seems most likely that a near-term bottom would occur. In such a case, the stock suggests being a speculative buy while the new price targets still have a certain upside to the current. However, Chase Coleman’s flagship fund Tiger Global disposed of his take in the company entirely in the first quarter after losing up to 44% in 2022. 8 other hedge funds also discarded the stock from their portfolios with ASAN now being held in 23 funds.
The tech sell-off amid the wider downfall of equities this year has ensured a steep decline of ASAN as well. The stock has continued its plunge down as the latest earnings report prompted investors to sell their shares. The quarterly earnings weren’t bad but the lack of focus on the wider losses of the company has investors worried. While they are selling shares of the company, and the stock is being downgraded, ASAN still has much potential in the long run. With hybrid and remote work the new norm, companies, and enterprises are adopting platforms like the company’s to better manage their business. Therefore, with a long-term bullish outlook, ASAN seems to be a speculative buy but for aggressive investors who can overlook the near-term haze.