Buy monday.com stock before it’s too late

Just five days ago, investment bank D.A. Davidson downgraded ⬇️ the shares of cloud collaboration firm monday.com to neutral from buy. Their analysis of 3rd point data analytics pointed to weak Q4 results, according to the bank.

On Monday, the company reported earnings that not only were not weak but actually exceeded expectations across the board. It beat Q4 sales and earnings estimates while its guidance was way ahead of analyst forecasts. Given the overall weakness in the tech sector, the company surprised investors and its stock soared.

It has gone up over 26% since earnings and there's still more upside left. At a time when most competitors pull back on spending to reduce cash burn, monday doubles down on marketing spending and because the competition is lower, it gets more for less. The company is thriving and gaining market share in the current tough macro environment, which is a sign that it has a better product than its competitors and a more efficient go-to-market strategy.

Leaving Competitors In The Dust

As we've seen in past monday.com issues, this is one of the youngest companies in the cloud collaboration space. Yet, it has grown so fast that it has now become the leading name in the space. Its market cap is now 2x larger than Asana's ($ASAN) market cap and is also larger than Smartsheet's ($SMAR). Both of these companies were founded many years before monday but failed to grow as fast as monday did.

One of the main reasons monday has become such a successful business is that it has successfully implemented the growth-at-all-costs strategy. This is a very risky strategy, especially in the current tight monetary environment. monday raised nearly $400 million in funding as a private company and spent the vast majority of that on marketing to grow fast. Just think that in 2020, the company spent $1.18 on marketing for every $1 in revenue. It used to burn cash like crazy to outgrow its established competitors, which is the definition of growth at all costs.

Fast forward to today and monday has achieved its goal of dominating the cloud collaboration space. Beyond the aggressive marketing spending, its differentiated product also helped it sustain its high growth rates. Unlike traditional collaboration tools, monday.com is actually a no-code building platform that allows customers to build their own work management tools. They can fully customize the product to meet their needs.

The company has recently introduced prebuilt templates for customers who don't want to build their own collaboration tools from scratch. The most successful of them is monday CRM, a modern customer relationship management tool that is more customizable and easier to use than traditional CRM tools. This product has been around for just a few quarters but it now accounts for about 50% of new customers.

The company continuously improves the platform to make it even more competitive and gain market share. Unlike competitors like Asana that have announced layoffs, monday continues to hire primarily for product development roles as its goal is to build the best collab tool in the world. Also, it follows a Shopify-like ($SHOP) strategy to make the platform stickier and more differentiated.

It has opened its platform to 3rd party developers, allowing them to build their own apps. It currently has 217 apps and the app center was created just two years ago. Third-party apps will allow customers to further customize the platform and build unique productivity tools, making them stickier and more valuable over time.

Continued Hyper Growth With Signs Of Macro Weakness

monday remains the fastest-growing public company in the cloud productivity space. The momentum is very strong and has allowed it to beat competitors. Yet there are now signs that its largest customers have started to pull back on spending due to the tough macro environment.

As you can see below, its Net Retention Rate, which shows the growth of spending from existing customers, has moderated lately. In Q4, the NRR of its largest customers fell to 135% from 150% two quarters ago. The drop doesn’t mean that customers are fleeing the platform. It means they don't expand their usage as fast as they used to. This is obviously because of the overall economic uncertainty as well as the spike in layoffs in some industries.  

Despite the recent drop, the NRR across all customer cohorts remains extremely strong 💪. It's clear the platform is very useful and there's very strong customer demand. monday is benefiting tremendously from the continued strong demand because competitors are pulling back on spending so it's easier and cheaper for the company to increase its customer base and gain market share.

In Q4, it increased its customers by 23% y/y to nearly 186,500, while its enterprise customer count spiked 85% y/y to 1,474. Combined with the increased use of the platform from existing customers, Q4 revenue jumped 57% y/y to $150 million or 60%, excluding the FX impact.

The current growth rates are impressive but even more impressive is the incredible operating leverage. As we saw above, monday's competitors like Asana are playing it safe and reducing their operating expenses. This means there's less competition in the digital advertising space and monday is able to get more for less. This is why its sales and marketing expenses increased only 15.5% y/y in Q4, but revenue spiked 60%. This is the definition of leverage.

All the other operating expenses also increased slower than revenue in Q4, allowing the company to report its first adjusted quarterly profit. It made $143 million in adjusted profit in Q4, translating into a 10% adjusted profit margin, up from a -10% margin in the year-ago quarter. Its non-adjusted operating margin also improved significantly to -7% in Q4, from -33% a year ago.

monday's cash flows are soaring as well in another sign of increasing operating leverage. As you can see below, its Q4 operating cash flow (OCF) came in at $34 million, up 161% y/y. This translates into an OCF margin of 22%, which is quite impressive given the rapid growth rates. The company has just started to achieve operating leverage meaning that as it grows and scales margins will go up.

What About Valuation

monday is not a cheap stock. At current prices of around $160 per share, it trades at 14.3x sales, which is a premium multiple. Yet, the company's earnings and guidance have exceeded analyst forecasts by a wide margin, suggesting continued strong growth and cash flow generation even during tough times. For 2023, they expect revenues of around $690 million, $30 million higher than analyst forecasts. This is a large beat and shows the growth momentum is still intact so the company deserves its premium valuation. Assuming its P/S ratio rises to 15 by the end of the year, the stock can rise another 45% from current prices to $232.

What Else

monday has left competitors in the dust. Its product is more powerful than the competing ones so the company can attract customers more easily. Also, its internal business intelligence tool BigBrain allows teams to manage their spending more efficiently and achieve stronger results than competitors.

Given the growth momentum and the product improvements, monday is going to become the leading work management tool in the world and will continue to reward shareholders for years to come.

MONDAY.COM RATING

Short Term: Buy

Long Term: Buy

🎯12-Month Price Target:

$172 ➡️ $232

I'm long MNDY.

The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions