Asana (ASAN) has gone public in a bit of an unusual offering process, called the direct listing, as this is the latest technology company to avoid the steep fees and profits generated by banks in the IPO process. The company has seen a very successful public offering, or better said direct listing. Trading at a sales multiple in line with its peers, I see no immediate appeal despite slightly higher growth rates as losses remain quite elevated at the same time.
Another Team Collaboration Tool
Asana has a mission to help humanity thrive by allowing teams to work together in an effortless way. The company has quite a large user base with more than 3.5 million freely-activated accounts since inception, more than 80,000 paid customers and about 1.3 million paid accounts/users, and all of this across nearly 200 countries.
The story of how the company came along is quite interesting as the company was founded by Dustin Moskotivz, cofounder of Facebook (FB) which firsthand witnessed the struggles of the organization as the company grew. Instead of focusing on the actual work which generates the results, more time was spent on meetings, coordination and responsibilities, and with that frustration in mind, he started Asana.
The company claims that 60% of knowledge workers’ time is spent on ”work about work” including overwhelming volumes of email and messaging applications. To minimize this, the company built a purpose-built solution with more than a million paid users currently, indicating real traction.
Ironically, they are individual business software solutions such as Teams, Skype, WhatsApp, but mostly Outlook which work fine in a narrow field, yet again create silos without a great logging system to keep track of tasks being performed or which individuals are responsible for doing so.
Valuation And Direct Listing Process
Asana drew up an offering document for the resale of little over 30 million shares to be sold by registered shareholders as the proceeds of this will not benefit the company but will go to existing shareholders.
In terms of reference pricing, as no official offering price has been determined, Asana claims that private market transactions so far this year have taken place in a range between $13 and $28 per share.
With a diluted share count of 150 million shares trading around $28, the company is awarded a $4.2 billion market valuation halfway during the first trading day, as this includes a net cash position of around $453 million. So with operating assets essentially valued at around $3.7 billion, what kind of business is behind Asana to perhaps justify this valuation?
For the year ending in January 2019 (so basically the calendar year of 2018), the company generated nearly $77 million in sales on which a hefty operating loss of $52 million was reported, with losses running around 2/3 of the sales rate.
Revenues rose nearly 86% last year to nearly $143 million yet operating losses rose both in absolute and relative terms. Operating losses more than doubled to $120 million, almost approaching the revenues reported for the year due to a big increase in stock-based compensation expenses.
It is noteworthy that growth slowed down quite a bit so far this year. Revenues were up 63% in the first six months of the year to a number just shy of $100 million, indicating that revenues run at a rate of $200 million a year. Operating losses essentially doubled to $63 million, although on a relative basis that comes in below two-thirds of revenues. For the second quarter, revenues grew 57% on an annual basis to just over $52 million, creating a run rate of $208 million per year.
With shares trading around $28 per share, the valuation comes in at around 18 times annualised sales here.
I must say that this is somewhat of an interesting company as management is thinking differently from most companies by opting for a direct pricing process. Risks include losses, but the cash position should be sufficient to fund losses for quite a while to come.
The other risk includes general economic conditions, SaaS-related risks to outages and cyber risk as the biggest risk is that of the valuation and that of competition. The question is which of all these software players are going to survive, thrive and dominate this field. A few dominant and publicly-listed peers include Slack (WORK), Atlassian (TEAM), Smartsheet (SMAR) and of course Microsoft (MSFT).
Atlassian is currently valued at around $43 billion and trades around 25 times annualized sales with full year sales up 33%. While this is a steep multiple given the slower growth, it is noteworthy that Atlassian reports flattish operating results, while its peers still report losses.
Slack, on the other hand, is valued at just around $14 billion, at around 16 times billings. Revenues were up 49% in the most recent quarter which is a bit slower than Asana as relative losses are somewhat similar, or actually a bit lower. Smartsheet is the smallest with a roughly $5.5 billion enterprise valuation, trading around 15 times sales. Losses are similar to Slack on a relative basis as this company grows sales in excess of 40% per annum.
Given the 18 times sales multiple at which shares currently are trading, this marks a small premium compared to Smartsheet and Slack with largely similar growth rates and somewhat smaller losses. Therefore, I fail to see the immediate appeal here and now, both on an absolute and relative basis.
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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.