Leading work management platform provider Asana, Inc. (ASAN), in San Francisco, had an impressive stock market debut in September 2020, going public via a direct listing. On July 21, the company announced that its Asana app for Zoom is now available in the Zoom App Marketplace, which hosts more than 1400 essential tools to boost productivity and collaboration. The stock has gained 304.4% in price year-to-date to close yesterday’s trading session at $119.49, due primarily to increasing demand for remote working solutions.

The shares also soared to hit their 52-week high of $122.08 on September 21, 2021, mainly because Jefferies analyst Brent Thill raised his  price target to $115 from $90.

However, ASAN faces stiff competition from players such as Atlassian Corporation Plc (TEAM) and Smartsheet Inc. (SMAR). Moreover, ASAN’s losses widened in the second quarter, and the company could continue to report losses in the coming quarters. So, ASAN’s near-term prospects look bleak.

Here’s what could shape ASAN’s performance in the upcoming months:

Top Line Growth Doesn’t Translate into Bottom Line Improvement

For its fiscal second quarter, ended July 31, 2021, ASAN’s revenue surged 72% year-over-year to $89.48 million. The company’s total liabilities decreased 38.7% sequentially to $456.24 million. However, its non-GAAP operating expenses for the quarter increased 63.9% year-over-year to $118.36 million. In comparison, its non-GAAP operating loss came in at $38.6 million, representing a 41.9% year-over-year increase. Its non-GAAP net loss was $39.80 million, representing a 51.3% year-over-year increase.

Disappointing Management Guidance

ASAN expects its revenues to be between $93 million - $94 million for its  fiscal third quarter, representing year-over-year growth between 58% - 60%. However, the company expects a non-GAAP operating loss of between $49 million - $47 million. Also, it expects a non-GAAP loss per share to be between $0.27 - $0.26.

Stretched Valuation

In terms of forward EV/S, ASAN’s 57.93x is 1,359.9% higher than the 3.97x industry average. Likewise, its 61.20x forward P/S  is 1,408.7% higher than the 4.06x industry average. Also,  the stock’s 133.07x P/B is 1,960.9% higher than the 6.46x industry average.

POWR Ratings Reflect Bleak Prospects

ASAN has an overall D rating, which equates to a Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. ASAN has a D grade for Growth. This is justified because analysts expect its EPS to decline by 22.7% for the quarter ending January 31, 2022. Furthermore,  its EPS is expected to remain negative in its fiscal year 2022 and 2023.

ASAN has an F grade for Value, which is in sync with its higher-than-industry valuation ratios. In addition, the stock has a D grade for Stability.

ASAN has a D grade for Quality. This is justified given its negative values for trailing-12-month ROCE, ROTC, and ROTA compared to the 8.29%, 4.80%, and 3.57% respective industry averages.

We've also rated ASAN for Momentum and Sentiment in addition to the POWR Rating grades I’ve just highlighted. Click here to get all the ASAN ratings.

Moreover, ASAN is ranked #51 of 59 stocks in the Software - Business industry.

Click here to check out our Software Industry Report for 2021

Bottom Line

ASAN’s shares have skyrocketed in price over the past few months, but they  seem to have reached their peak. Wall Street analysts expect the stock to hit $90 in the near term, which indicates a potential 24.7% decline. So, we think the stock looks overvalued at the current price level and is best avoided now.

How Does Asana (ASAN) Stack Up Against its Peers?

While ASAN has an overall POWR Rating of D, one  might want to consider investing in the following Software - Business stocks with an A (Strong Buy) rating: SS&C Technologies Holdings, Inc. (SSNC), CSG Systems International, Inc. (CSGS), and Software AG (STWRY).

ASAN shares were trading at $118.77 per share on Thursday morning, down $0.72 (-0.60%). Year-to-date, ASAN has gained 301.93%, versus a 19.75% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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