Shares of project management software outfit Monday.com (NASDAQ:MNDY) have been hot since its IPO in June. After debuting in public trade at over $170 per share, the stock has traded as much as 48% higher during its first month.
There's good reason for the optimism surrounding this company. Though it competes against project management software leader Atlassian (NASDAQ:TEAM) and fellow upstart Asana (NYSE:ASAN), this is a growing niche of the cloud-based software world and Monday.com has deep pockets -- and even deeper-pocketed friends. This is a top stock to put on your buy list if you are willing to wait out what is sure to be a wild ride over the next few years.
Project management heads to the cloud
Thanks in no small part to Atlassian (which is responsible for programs like Jira and Trello), project management software that helps organize workflows for business teams has been a high-growth industry. Atlassian has been growing revenue at a double-digit pace for years and is something of an under-the-radar IT industry titan these days. The Australia-based company has hauled in nearly $2 billion in sales over the last 12-month stretch.
But a new breed of cloud-native software vendors has popped up in this space in recent years. Asana has been ranked as a top project management tool by users and tech industry analysts, and management expects sales to grow by at least 48% this year to $336 million. Asana isn't alone, though. Monday.com is the newest independent publicly traded project management developer, having only launched in 2014. Since then, the Israel-based technologist has been on a tear. It reported revenue of $59 million in the first quarter of 2021 ($236 million on an annualized rate), an 85% year-over-year increase.
Monday.com attributes its success to the flexible nature of its platform. Rather than a pre-packaged service, Monday.com is a no-code and low-code offering (like fellow Israeli technologist Wix.com) that allows users to build their own applications to suit their needs -- no software programming know-how required. It integrates with hundreds of other software vendors to help teams customize their workflow management, allows for automation of repetitive tasks, and has a free-to-use tier for organizations that are just getting started.
The company cites a report from tech researcher IDC which estimates that the total market for business software, operating systems, and related services could reach nearly $88 billion in annual sales by 2024, up from just $56 billion in 2020. Though Monday.com is far from alone in this space and has additional competition from heavyweights like Microsoft and Adobe (which acquired project management software firm Workfront last year), this is a growing pie that can feed many players.
Powerful positioning within the tech world
In addition to the flexible nature of its service suite, Monday.com has some powerful investors. During its IPO, it attracted $75 million in funding each from Zoom Video Communications and Salesforce.com -- meaning both now have a vested interest in Monday.com's future success. Additionally, Monday.com raised some $630 million in cash (before fees) from its public offering. Post-IPO, this high-growth software firm will have over $800 million in cash and equivalents and zero debt, giving it a net cash position rivaling that of Atlassian and far more financial strength than Asana's positive net-debt position.
This is also an efficient operation. Monday.com reported it had used only $121 million of capital from its founding to March 31, culled from $236 million in annualized revenue in Q1. And though it isn't profitable yet, Monday.com generated negative free cash flows of only $5.3 million in the first quarter. This cloud computing company is close to generating all the cash it needs to self-fund its operations and has an enviable cash reserve from which it can continue to expand aggressively.
There is a rub, though. Monday.com's enterprise value (market cap minus cash and equivalents) is some $8.2 billion as of this writing. That values the stock at 35 times annualized Q1 2021 revenue to enterprise value, a steep price tag for a software outfit that isn't profitable yet. Even if Monday.com can maintain its torrid pace of expansion, this will be a volatile stock prone to wild up-and-down swings in price.
Nevertheless, Monday.com deserves more than a passing glance. Project management software is an important realm of the cloud industry, and though Atlassian is the leader on this front, the door is open for Monday.com and peer Asana to elbow in on the action. I'll be making a small initial purchase in the next couple of months (I usually wait for at least one quarterly earnings update after IPO before buying, so I can get a clearer view of the business before putting actual cash to work). If you follow suit, remember to keep that initial purchase small (say, less than 1% of your portfolio) so you have room to buy more over time if Monday.com's investment thesis plays out.