Asana, Inc. (NYSE: ASAN) saw its shares plummet 13.3% on Friday, erasing roughly $310 million in market value, even after the company reported better-than-expected second-quarter results. The selloff was driven by the company's aggressive push into artificial intelligence, which is expected to pressure gross margins by approximately 150 basis points in the second half of the fiscal year.
The stock closed at $8.75, down from its previous close of $10.09, with volume exceeding 13.9 million shares. The session low was $8.32, and the high was $9.01. The market's reaction underscores the tension between Asana's AI ambitions and its near-term profitability.
AI's Growing Contribution
AI products, including AI Studio and AI Teammates, supplied about 25% of net new annual recurring revenue (ARR) in the second quarter. Management expects these products to drive significant growth but also to compress gross margins. The company cited one-time AI compute and scaling costs of 80 basis points in Q2 and a 30 basis point impact from StackAI. Additionally, a $1.2 million revenue timing shift will affect the second half.
The company is bundling basic AI requests into every paid tier this month, aiming to accelerate adoption. However, the strategy assumes that customers will eventually purchase paid consumption packs as usage expands, a step that remains unproven.
Financial Performance and Outlook
For the quarter, Asana reported revenue of $216.4 million, surpassing expectations, and adjusted earnings of $0.10 per share. Operating cash flow came in at $46.0 million. Non-GAAP operating margin improved to 10%, up three percentage points, but non-GAAP gross margin fell 120 basis points sequentially to 87%.
The company forecast third-quarter revenue of $217 million to $219 million, implying 8% to 9% growth, a slowdown from the second quarter's 10% pace. Adjusted earnings guidance of $0.08 per share missed the consensus estimate of $0.09. The revenue midpoint was roughly in line with Wall Street projections.
Analyst Reactions
Several analysts updated their price targets following the earnings release. Citizens JMP reiterated its Market Outperform rating with a $15 target, representing a 71% upside from the current price. UBS raised its target from $8 to $10 with a Neutral rating, while DA Davidson increased its target from $8 to $9, also Neutral.
Retention metrics improved, with overall net revenue retention at 97%, up two points from the prior quarter, and 98% among larger customers. Despite this, existing customers are still shrinking overall, indicating that the company has yet to reach expansion territory.
Strategic Shift and Risks
CFO Aziz Megji said the company is "raising our full-year revenue and non-GAAP operating margin guidance." The new revenue range is $858.5 million to $863.5 million. However, most of the revenue beat did not flow through to the bottom line immediately due to packaging changes and consumption accounting.
Risks include the possibility that bundled AI may delay purchases of paid capacity, compute costs could remain elevated, and the 97% retention rate still implies contraction among existing customers. New applications are expected to contribute more significantly in fiscal 2028.
Investors will be watching September usage data as the first evidence of whether bundled AI requests convert into paid packs before gross margins dip to the mid-80s. Friday's price action suggests the market wants proof sooner rather than later.