Asana, Inc. (ASAN) is a tech company that develops work management platforms to help individuals, team leads, and executives better organize their work. As future work becomes more complicated and interdisciplinary, Asana’s tools will be more important. I believe Asana is a high-quality company with lots of potential for excellent long-term returns in the future. Here I will discuss some of my thoughts.
The stock price fell while the trajectory of sales growth remained intact
ASAN is undoubtedly one of the fast growers in the tech companies that facilitate work and productivity. Although the stock price has fallen almost 57 percent from its high, it still grows at a hyper-fast mode. The company has seen strong top-line growth, large customer wins, and record-breaking adoptions. Annualized revenue grows to 400M with the current 2M paying users. Customers that spend $5000 or more grow 96%. The gross margin increases to 90%. According to CEO Dustin Moskovitz, all customer engagement metrics such as conversion, adoption, retention have hit record levels.
Signs of dominance in the enterprise group
For small groups or individuals, emails, Google calendars, and spreadsheets may be good enough most of the time. However, the need for work management tools increases exponentially once we have larger teams or more complicated collaborations with others. Last quarter (chart below), ASAN showed strong attraction to bigger customers that spent $5000+ with 58% YOY growth (14143 customers). Competitor Smartsheet (SMAR) has a bigger existing customer base (17000+ customers) but grows by around 10% YOY. If this momentum continues, ASAN will surpass SMAR very soon (2 to 3 quarters). Net retention rate is also higher for larger customers (overall customer: 120%; $5k+ customers 130%; $50k+ customers 145%).
According to the earnings call, Warner Music Group, Benevity, Team Rubicon, one of Japan’s largest automotive manufacturing companies, and one of the largest chocolate manufacturers in the world are all going to use ASAN (with 8-figure deals). These are the largest companies in the world with complex structures. They are going to use ASAN tools wall-to-wall for all departments.
Asana WorkGraph is unique
Powered by a proprietary, multi-dimensional data model called the Asana Work Graph, ASAN management believes that their platform is the best in the world. The Work Graph is uniquely architected for cross-functional capabilities. According to IDC, companies can achieve an estimated 225% ROI in the first year of their adoption to the Asana platform. There is a 5 minute video on the Asana IR website providing a detailed explanation of the Work Graph Data Model. Here is a description from the CEO during the 2020 Q4 conference call:
Thanks to the Work Graph. And we are the only solution that can provide clarity to the individual, teams and executives based on a shared source of truth. Customers rave about this and the Work Graph is what makes it work.
Building a moat with high switching costs
Like Microsoft Office, Google email, or PDFs, the Asana platform solves some universal coordination issues facing all companies. All your work records, contacts, plans will be created and saved on Asana so that they will be indispensable once adopted. Customers have already invested a lot of effort to learn Asana toolsets, functions, layout, etc. To switch to another one needs a huge amount of time and effort to move data and retrain team members. Unless there is a new tool that is 10X better, existing customers are very likely to continue to use the Asana platform.
Asana is very good at connecting people between different position levels in the company. With more and more users (especially people at the leadership level) signed up for Asana products, these users will recommend Asana to other co-workers through word-of-mouth.
Asana was ranked as a leader by IDC MarketScape 2021 vendor assessment in the category of Worldwide Collaboration and Community Applications. It was also recognized in Fast Company’s first annual list of Brands That Matter. From the chart below, Asana’s gross margin is growing to 90.45% and remains the highest from peers. Given its favorability, I think it is very likely Asana will take the majority of the market share once it obtains the leading position among competitors.
Capable and Committed Management Team
For tech companies nowadays, people are the most important assets. ASAN has a strong management team led by CEO and Co-Founder Dustin Moskovitz, who co-founded Facebook and is only 36. Dustin is working full-time for Asana with zero salaries and owns 55.6M shares of the company (28%). Since the ASAN IPO, he has been an active buyer of his own company. Other board members consist of engineering-oriented backgrounds and have held leadership positions in tech giants such as Google (GOOG), Facebook (FB), and Oracle (NYSE:ORCL). This leadership team has the incentives and capabilities to run a great company.
Dustin understands the importance of having a good reputation and is very serious about building a company culture. Asana is Inc. Magazine’s Best-Led Companies in 2021 and #1 workplace by Great Place to Work and FORTUNE. You can see a 4.9 out of 5.0 score, a 100% CEO approval rating, and a 99% “Recommend to a Friend” rating on Glassdoor. Such a reputation enables ASAN to retain exceptional talent and earn trust from customers.
The stock is not cheap, but it depends on your timeframes.
ASAN is not a cheap stock, with a price/sales (PS) ratio of 30x (similar to MNDY). Matured companies like Oracle (ORCL), Salesforce (CRM), and Google (GOOG) only valued around 5 to 8x. ASAN needs to grow sales to 2.28B to reduce the PS ratio to 5, which requires a CAGR of 40% for the next five years. Considering the current 60% YOY growth, I don’t think it is difficult. Using the recent 334M sales as a starting point and assuming ASAN could achieve a 20% cash conversion rate, we could get an estimated DCF collection of 9.8B of present value by setting a growth rate of 40% & discount rate of 4% for the first five years and growth rate of 20% & discount rate of 6% for the second 5 years. Consider the $10B current market cap; this is not a bad return.
Regarding the long-term runway ahead, ASAN expects that the work management software TAM is about 50B. Assuming ASAN can achieve what Google did in the digital advertising market (29% market share), then a 14.5B annual revenue could be possible.
The work management software industry is still at its early stage. Many competitors, like Google, Amazon, Microsoft, have more financial and labor resources than ASAN. Given the rapid pace of innovation, there is no way to guarantee that ASAN’s technology will outperform others ten years from now. ASAN’s technology and design may be modified or copied by its competitors and lead to price wars. Moreover, ASAN may have difficulties adapting its platform perfectly to a broad range of use cases and cultures under a global expansion strategy.
Overall, ASAN is a high-quality company in a high-growth industry. With its current momentum and strategy, it should attract more and more people to adapt to its platform. The high switching cost will provide stability for future profitability. This is a great long-term investment target and worth a spot in your portfolio. I will closely watch its future adoption rate in the enterprise space (more sticky). If ASAN cannot keep a leading position in that space, I will start to get concerned.