Most of Asana’s (NYSE:ASAN) price decline in recent months is the product of market volatility. But we can’t blame external factors for what happened with ASAN stock on March 10.
What happened on March 10? Following its release of earnings, guidance and other updates, shares in the work management platform provider plunged over 20%. Not so much for the earnings themselves. Instead, it was entirely due to guidance, plus a subsequent analyst downgrade (more below).
In the past week, shares have tried to recover. After falling to the low-$30s per share (it was near $50 per share right before earnings), it has since inched back to around $39 per share. Yet with its latest plunge due to company-specific news, is it time to take a pass on it?
Not so fast. Sure, its largest bit of news sounds bad. It certainly doesn’t bode well for results in the quarters ahead. Even so, there may be a silver lining. The company is trading some short-term pain, for what could be substantial long-term gains. With the strategic move it’s embarking on today, it may see its growth re-accelerate later down the road.
In turn, this might give the stock a strong chance of ultimately making a recovery. Put simply, this latest development may not completely destroy the bull case for it.
ASAN Stock and Its Double-Digit Plunge
For the quarter ending December 31, 2021, Asana beat on revenue estimates, generating $111.9 million in sales, up 64% from the prior year’s quarter. Adjusted losses also came in below sell-side estimates.
Again, it wasn’t recent results that caused the plunge in the price of ASAN stock. It was the guidance management provided for the coming year. Namely, instead of seeing its losses narrow, losses could slightly widen. Why? As CEO Dustin Moskovitz put it in a statement that accompanied earnings, “We are cementing our leadership position by increasing investments further to meet this large and growing enterprise demand.”
Translation? The company’s keeping its foot on the gas, with plans to spend heavily in order to maximize growth. This may be seen by the market as a risky move. After all, with increasing concerns about a recession, we may see some belt tightening when it comes to enterprise IT spend. At the same time, Asana is aggressively pursuing this market.
Right after its earnings report, citing both the news of further losses, plus the prospect of a sharp slowdown in revenue growth during the upcoming fiscal year (from 67% to around 40%), JP Morgan analyst Mark Murphy saw this as reason to downgrade the stock.
Changing his rating from the equivalent of “hold,” to the equivalent of “sell,” Murphy cut his price target from $66 to $32 per share. The bounce back notwithstanding, investors seem to agree with his take. They could continue to do so in the short term.
Why Asana’s Poorly Received Move May Be the Right One
ASAN stock may have taken yet another beating from the company’s recent guidance update. But it’s not for certain that management is taking the wrong path deciding to pursue a plan to re-accelerate top-line growth, rather than focus on narrowing operating losses.
Admittedly, many factors point to a re-acceleration of its revenue growth taking time. For instance, much of its growth last year and in 2020 may have been growth that pulled forward, due to the pandemic. Also, a possible economic slowdown/recession could lead to a reduction in corporate IT spend. This could delay the adoption of Asana’s platform by some would-be customers.
That said, while the “payoff” from its current efforts may not be immediate, that’s not to say it will never arrive. There’s robust demand for Asana’s product, which helps businesses improve productivity. Right now, the company has only a small bit of the overall market for this type of service.
How big is this market? Massive. This space may be worth $50 billion in annual revenue. Even if it ultimately grabbed just 10% market share, that would result in it generating $5 billion per year in revenue. That’s nearly 10x estimated revenues for the current fiscal year.
The Verdict on ASAN Stock
Earning a “B” rating in my Portfolio Grader, the market may be wrong in its conclusion that the route Asana’s going — growth over a faster move to profitability — is the wrong one.
With the potential to someday scale into a multi-billion dollar business, the route it’s taking now could pay off in a big way down the road. Maybe not within the next year. Definitely not within the next quarter. Over the next few years? There’s a strong chance it does pay off.
But if you’re looking at ASAN stock as a long-term play, I wouldn’t view the most recent news from the company as a deal breaker.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
