Asana: Collaboration Play At A Full Valuation (NYSE:ASAN)


Asana (ASAN) is a work management platform competing in the hyper-competitive project management space. The company has seen strong traction with over 75,000 paying customers and 1.2MM paying users utilizing the Asana platform. The company recently IPO’d and although had a great day one has not been able to maintain the momentum as seen below.

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Part of it is just due to valuation, which I will explain later on, but part of it is due to slowing growth, declining user economics, an increasingly competitive landscape, feature commoditization, and an increasingly expensive go-to-market driving higher burn.

If we look historically, growth has been strong with the company growing from $76.8 million to $142.6 million for FY 2020 (86%. YoY). However, revenues only grew 70% YoY to $47.7MM for 2Q21. This further has declined to 57% YoY for 3Q21 to $52MM. This number more importantly is 9% on a QoQ basis. This slowdown is concerning, because one would assume that, like Zoom (ZM), the company would have been a beneficiary of COVID-related tailwinds as stay at home orders spurred the growth in digital collaboration tools.

User economics are also beginning to show high-level issues. For one, overall dollar based net retention was 115% in 2Q21, which is down from 120% in FY20. Although one can argue that the delta here is nominal, COVID-related impacts to work should have driven a stronger degree of upsell in my opinion.

From a competitive landscape perspective, whether you look at Asana, Monday.com, or Workfront, most of these project management solutions have very similar features and pricing. They all offer some form of collaboration, task management, and timesheet tracking functionality as an example. Differentiation in this space is tough to find on a point by point feature perspective or on a user-intuitive GUI perspective. What has been happening in the industry is an increase in product breadth beyond just project management. That is the tack that Smartsheet (SMAR) has undertaken expanding into both DAM and enterprise resource management. Asana being more of a pure-play project management will eventually have to expand outside of this niche as market positioning will become increasingly tough due to feature commodiziation but also the incredibly competitive and crowded field with numerous players ranging from Monday.com, Wrike, Workfront, and Smartsheet just to name a few.

Alongside this backdrop of declining YoY growth rates, we have seen losses expand from a net loss of $50.9MM in FY19 to $119MM in FY20 or a 133% increase. This has since expanded to $76MM vs $30.5MM for the 6 months ended 2Q21 vs the year prior which is almost ~150% YoY. The reason for the increased burn is to invest in the product platform as well as sales and marketing. However, with sales efficiency heading the wrong direction, it is unclear if the increased investment in sales is really going to drive the top line re-acceleration the company needs to demonstrate for the public markets.

The saving grace for this company as well as many others in the space is just how large the addressable market is. According to the company’s SEC filing, the market for collaborative applications and project/portfolio management is projected to hit $32 billion in 2023. A very small portion of this has been penetrated thus far. Thus there should be room for quite a few vendors to succeed. It is unlikely that Asana will be one of the “losers” in the space, but at the same time it is tough to say that Asana will be one of the “winners”

From a valuation perspective, the company trades at ~20x EV/Sales. Just given the issues highlighted I highlighted in this article particularly the moderation of growth, I believe that it is a hefty valuation. In terms of comps, I believe that Smartsheet (~16x EV/Sales), which is growing ~30% YoY range, is most fair just given that they are in a similar space and has a lower growth rate vs Asana. Thus, although there is room for upside from here if the company can show re-acceleration of growth, the current valuation is full.

Conclusion

Overall, the company has developed a strong project management platform. However, slowing growth, an increasingly competitive landscape, and reducing competitive differentiation, amongst other issues are growing areas for concern. Additionally, the valuation is full at this time which leads me to my neutral rating.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.





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