Asana Has Lost Its Luster, but Not Its Opportunity

Equity markets had a strong start to the year. After a disappointing close on Friday, stocks roared back on Monday. Even the small-caps sector participated, and that is an important development. The major indices cannot continue their breakout much further without them participating. That’s why Asana (NYSE:ASAN) is worth considering at today’s levels, even though ASAN stock has fallen from grace.

Asana logo displayed on a cellphone
Source: rafapress / Shutterstock.com

After a lackluster start to 2021, ASAN stock broke out in June and in a massive way. The rally extended 290%, but sadly for those who chased it too late, it crashed hard at the end of 2021.

After its November highs, ASAN stock lost 57% of its value in about a month. The good news is that since then, the bulls have defended $60 per share vigorously.

Off that support, there were three trading opportunities each for 25% runs. The short-term bullish set up now is for it to hold $70 per share. This could finally help it break out from the roof that currently exists $10 higher.

ASAN Stock Opportunities and Challenges

Asana (ASAN) Stock Chart Showing Potential Support
Source: Charts by TradingView

The upside is not likely to be easy, as $80 per share has been pivotal since September. Back then, it took it a favorable earnings report reaction to break out of it.

Sadly, the December report had the exact opposite effect. Luckily, ASAN doesn’t report again until early March, so there’s a lot of room for chop.

Long-term investors can wade back into the stock based on its fundamentals. It has been delivering strong growth for three years, so the metrics suggest success. However, it is still too young to call it a sure thing, so there is room for doubt.

There’s also the problem of having a price-to-sales (P/S) ratio of 36, which instills valuation concerns.  I’m not too picky about that, because this is still a growth story. However, the P/S ratio could scare off a good cross-section of investors.

Regardless, smart investors should only take partial positions. Going all in from the initial entry is reckless.

ASAN’s scenario lends itself well to using options. There, investors can deploy strategies that would leave room for error. For example, as of noon today, I could collect $3 per contract for selling the $57.50 ASAN February put. This would give me the opportunity to own shares at that price and break even at $54. Owning shares after a 15% decline is an acceptable worst-case scenario in this case. If I don’t end up owning them, I will have created income out of thin air.

Other Factors to Consider With Asana

Buying stocks for the long-term when markets are at all-time highs carries unusual risk. ASAN stock does not trade in a vacuum, so we must consider the market-wide correction. Using options can help mitigate some of the associated risk.

Nevertheless, those who prefer to simply buy shares should only deploy partial positions. Don’t confuse this with averaging down, because I am not a fan of doing that. What I’m suggesting is “averaging in” by taking smaller bites. Averaging down merely makes your problem bigger.

As for the company itself, Asana’s services fit with the trends that were accelerated by the pandemic. It empowers businesses to help their team manage projects using the cloud. This is especially useful, since many workers seem to be telecommuting these days. Remote productivity and effectiveness are essential parts of successful companies.

Asana’s features touch on all of those points. They help with automation, workflow and reporting among other things. These are necessities that web-based companies will need for a long while.

Demand is not going to be a problem for Asana, and that is already showing in its profit and loss (P&L) statement. However, Wall Street will need to see more of it to grow more confident in ASAN stock.

The annual revenues are growing at a rapid pace. Management will need to maintain this to normalize its P/S ratio. I’m not looking for cheap, but I prefer more reasonable expectations. Zoom (NASDAQ:ZM) did it by maintaining its 2021 growth. Asana will need to do something similar this year.

ASAN Stock Faces Headline Risks

Judging by how violent the reactions were to the last two earnings reports with a split decision, ASAN stock will see considerable headline risk. Asana is delivering sequential growth in revenues and gross profit, but sentiment is what matters in the short term.

If ASAN stock falls below $61 per share, it could invite momentum sellers. The risk could then carry it another 20% lower. Although this is not my forecast, investors need to know that it is a possible scenario.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com


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