Despite geopolitical challenges, monday.com overdelivers again

The war in the Middle East, the latest in a string of global geopolitical disruptions, has had a negative impact on the stock prices of Israel-based companies listed in New York. Cloud collaboration company monday.com ($MNDY) is one such company.

In September and October, MNDY lost over 30% of its value due to the recent geopolitical crisis in the region. However, the stock has already recouped almost all of its losses thanks to another solid earnings report released last Monday.

Q3 earnings exceeded estimates on both the top and bottom lines and the company raised its full-year outlook again, in a clear sign that the growth momentum remains intact. Monday.com is rapidly gaining market share in a highly competitive space, thanks to its differentiated offering. At the same time, it is delivering rapidly increasing cash flows, outperforming its main competitors. This strong fundamental performance can help MNDY rise much higher in the mid-term. Let's take a deeper dive.

Gaining Market Share by Innovating Aggressively

While most tech companies are seeing slowing demand for their cloud offerings, monday.com seems to be a rare exception. The company continues to see robust demand for its modern cloud collaboration platform, perhaps due to its relentless innovation that leads to the introduction of new features that make the platform more powerful and unique.

The strength of monday.com lies in its ability to deliver powerful and unique features that set it apart from competitors. The company's strategy involves regular updates to its platform, ensuring that users have access to the latest tools and capabilities. One such recent introduction is mondayDB, a database solution designed to empower users with enhanced data management capabilities.

mondayDB 1.0 was successfully launched earlier this year, leading to enhanced performance and capabilities, primarily for larger customers with more advanced needs. The company has already introduced mondayDB 1.1, the newest version with significant live dashboard improvements that will be available to all customers by the end of Q1 2024.

monday.com has also introduced several AI functionalities to make its platform even more powerful. It has launched monday AI Assistant, a collection of AI-powered apps that help companies become more efficient by automatically generating tasks, composing and rephrasing emails, summarizing complex tasks, building formulas, and more. For example, Formula Builder and Solution Builder, two newly released AI functionalities, have received positive feedback.

Besides monday AI Assistant, the company has launched two other successful apps, monday CRM, a modern CRM tool, and mondayDEV, a suite of tools for managing the software development lifecycle. Both products are growing faster than the core business, showing promising results and customer adoption. The addition of CRM and dev tools to its collaboration platform demonstrates the company's holistic approach to meeting diverse business needs. This expansion not only caters to existing users seeking more comprehensive solutions but also attracts new users looking for an all-encompassing platform. The two new products help monday.com onboard new customers faster as these are prepackaged offerings that customers can easily start using.

Stellar Top & Bottom Line Performance

As we saw in a recent newsletter, monday.com has a cost advantage over direct competitors like Asana ($ASAN) because it is based outside of the expensive Silicon Valley area. This cost advantage has massively helped the company gain market share by spending aggressively on sales and marketing (S&M) and achieving economies of scale at the same time.

For example, in Q3, monday.com spent 54% of its revenue on S&M and delivered revenue growth of 38%. By contrast, Asana spent 59% of its revenue on S&M in the most recent quarter but grew its revenue by only 20%. A possible explanation could be that salespeople in California are paid more than the salespeople in Israel, but they don't necessarily deliver a higher ROI, meaning that Asana can't compete with monday.com on growth efficiency.

monday.com has also developed a proprietary cost management system, the "BigBrain," that allows the company to measure in real-time the efficiency and ROI of its marketing spend so that it can always operate at maximum efficiency. In the most recent quarter, sales and marketing expenses increased by only 19% y/y, which shows that BigBrain does help the company achieve significant marketing leverage over time.

Obviously, the strong operating leverage couldn't have been possible without offering a high-quality and sticky product. In Q3, the number of customers spending over $50K per year jumped 57% y/y to 2,077. This is an impressive performance and shows that monday.com is increasingly becoming the platform of choice for large enterprises due to the continued introduction of new products and capabilities.

Also, the Net Retention Rate (NRR) stabilized during the quarter at above 110% for the second consecutive quarter, which is a sign that customer conservatism may be nearing its end. Monday.com can sustain its total NRR above 110% for the foreseeable future due to the introduction of new products like monday CRM as well as other functionalities that make customers spend more over time.

The strong customer growth coupled with impressive cost management, helped Monday dramatically improve its profitability and free cash flow during the quarter. Its Q3 operating income margin improved to -1.3% from -20% in the year-ago quarter. And if we exclude stock-based comp, Monday delivered a Q3 adjusted income margin of 13% vs. a margin of -2% a year ago. This is a spectacular year-over-year improvement and underscores the strength of monday’s business model and growth strategy. The company also delivered an operating cash flow of $66.6 million, up 233% y/y, which translates to an OCF margin of 35%. monday.com is officially the most profitable publicly-listed cloud collaboration company, leaving competitors in the dust.

What About Valuation

Even after the recent spike, Monday.com stock remains very attractively priced and is actually undervalued. As you can see below, at current prices of around $163 per share, monday trades at a lower Price/Free Cash Flow ratio than Smartsheet ($SMAR), and Atlassian ($TEAM), two of its main publicly listed competitors. The discount doesn’t make sense as Monday is growing much faster than both of its competitors and boasting higher cash flow margins.

Assuming the company delivers an FCF margin of 33% in 2024 — which is lower than the current FCF margin of 34.7% — and the P/FCF ratio rises to 45x, the stock could rise 70% from current prices to $290 by the end of 2024.

What Else

monday.com’s fundamental performance has been rather impressive amid a challenging economic and geopolitical environment. This solid performance is driven by its differentiated cloud collaboration platform and efficient go-to-market strategy. And it can continue due to the increasing demand for cloud collab tools as companies adapt to hybrid and remote work environments. Given monday.com’s growing leadership in this space, the company can continue to thrive for the foreseeable future.

MONDAY.COM RATING

Short Term: Buy

Long Term: Buy

🎯 2024 Price Target: $290

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.