Asana: CEO Owns 50% Of Shares Outstanding, 15% Net Cash (NYSE:ASAN)

Looking for a tech stock down 90% from 2021 highs? Look no further than Asana (NYSE:ASAN). The enterprise tech company has seen growth rates slow down due to tough comparables and a tough macro backdrop, but the current valuation is too pessimistic. The company maintains a cash-rich balance sheet and growth rates remain impressive considering the de-risked multiples that the stock is trading at. This is a name which looks more than reasonably valued based on current growth rates yet can see explosive returns if growth rates accelerate as expected. ASAN remains highly buyable here.

ASAN Stock Price

After peaking above $140 per share in late 2021, ASAN has fallen an astonishing 90%.

I last covered ASAN in November where I rated the stock a buy due to the de-risked balance sheet as CEO Moskovitz made a $350 million cash infusion into the company, topping off what is already an outsized equity stake. The stock is down 21% since then as the tech sector has maintained maximum volatility.

ASAN Stock Key Metrics

ASAN delivered 40.9% YOY revenue growth in the third quarter to $141 million. That came ahead of guidance for $139.5 million in revenue.

As is typical, much of that growth was driven by high dollar-based net retention rates as its largest customers, with customers spending more than $100k seeing expansion rates in excess of 140%.

Meanwhile, ASAN has been rapidly increasing large customers – this is a trend that investors should welcome considering that the macro environment is likely to put more pressure on smaller customers.

The fact that ASAN has been able to sustain high net retention rates is intriguing, especially considering that ASAN has not been rewarded with the typical premium multiple associated with companies capable of that feat. Perhaps there is fear that in a recessionary environment, customers may struggle to grow headcount (and that is presumably a large driver of expansion rates). On the conference call, management acknowledged such macro impact and cited that as reason for their decision to focus on larger customers.

ASAN’s growth was actually held back from its international segment, which saw only 33% revenue growth. That itself was held back by about 500 bps of currency headwinds, but one also must remember that international customers may be more exposed to the negative ramifications of the ongoing Russia-Ukraine war.

Looking ahead, ASAN guided for $146 million in fourth quarter revenues, representing 30% YOY growth and falling just short of the $151.2 million expected by consensus. That disappointment may explain why the stock immediately fell upon releasing earnings.

The company ended the quarter with $545 million of cash versus $30.4 million of debt, a very strong balance sheet position courtesy of CEO Moskovitz’s previous cash infusion.

Management reiterated its expectation of achieving positive free cash flow generation by the end of 2024. The company had reduced headcount by 9% this year – some analysts may have been concerned that this would have a negative effect on the free cash flow outlook due to the potential for reduced operating leverage. Management noted that they do not anticipate it having any effect on their outlook because they had “front loaded quite a lot of hiring especially in sales and marketing and especially in talent acquisition.” Management believes even as it moderates its pace of hiring, it can still achieve the rates of growth and operating leverage needed to drive positive cash flow generation.

Is ASAN Stock A Buy, Sell, or Hold?

ASAN remains a compelling idea in project management. Old coordination solutions like spreadsheets and other legacy projection management software are insufficient to meet customer needs.

ASAN enables its customers to more efficiently coordinate projects, helping to boost overall productivity.

While management appears to believe that growth rates can accelerate upon a macro recovery, consensus estimates are less optimistic, projecting mid-20’s growth over the next several years.

The stock looks cheap even based on those pessimistic expectations. Based on 23% projected growth, 20% long term net margins, and a 1.5x price to earnings growth ratio (‘PEG ratio’), I could see ASAN trading at 6.9x sales, representing a stock price of $22 or 40% potential upside over the next year. I note that I have not given credit for the net cash making up 15% of the market cap.

What are the key risks? Given the company’s small size, it may be more exposed to macro headwinds. It is possible that customers choose to work with more established names in such an environment. The company continues to burn cash and there is no guarantee that management will successfully execute on positive cash flow generation by 2024. Further, while the valuation appears compelling here, it is not necessarily “dirt cheap” relative to peers and investors should expect great volatility nonetheless.

It is worth noting that CEO Moskovitz owns around 109 million shares – roughly half of outstanding shares – and receives zero compensation from the company. This is an “owner-operator” company and investors can rest assured that management is heavily incentivized to drive strong shareholder returns. As I have discussed with subscribers to Best of Breed Growth Stocks, the best way to take advantage of the tech stock crash is by investing in a portfolio of undervalued tech stocks. ASAN fits right in with such a portfolio and I continue to find the stock highly buyable here.