At the start of the year, many investors look for new stocks to bolster their portfolios. Finding new stocks is not difficult, considering that 2021 was one of the biggest years for IPOs, but finding the high-quality stocks out of those newly public companies can be more challenging.
Monday.com (MNDY -3.80%) came public in 2021, and it quickly jumped over 120% from its IPO price in just a few months. However, like almost all tech stocks, it has fallen drastically since November, and it is now only 14% above the price it came public at. Is this price a buying opportunity? Let's find out.
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What does Monday.com do?
Monday.com has become a platform where over 135,000 companies -- including some of the biggest companies in the world, like Tesla(TSLA -1.92%) -- build software applications and work management tools to optimize efficiency. The company's Work OS platform allows customers to build no-code software and tools that can be used across an enterprise, making sure projects can be completed easily.
What is truly special with Monday is its integrations with nearly every app imaginable. Whether an HR team needs information from Microsoft's LinkedIn or a marketing team needs data from Hubspot, Monday.com can integrate data into its platform to make it easy to find and use mission-critical data. The company can integrate data from dozens of applications and allow different departments to use that information for whatever they need. With these integrations, Monday.com becomes the centralized location where employees can find almost any piece of information a company has.
A lot of potential
Another competitive advantage that Monday has is how easy it is to begin using. Unlike other companies like Appian -- which offers low-code software building tools -- with which it can take months to get onboarded to start developing software, consumers can get started with Monday.com in just minutes. Monday.com also offers a free version for individuals, allowing for a lucrative land-and-expand strategy. This strategy has been paying off: In Q3 2021, the company's net retention rate for customers with over 10 users was 130% -- meaning customers that spent around $100 in Q3 2020 are now spending an average of $130.
The company still has plenty of potential because of the fast-growing industry it operates in. Monday sees a total addressable market of $87.6 billion by 2024, and considering that the company is expecting just $300 million in revenue for the full year of 2021, Monday.com has barely scratched the surface of its opportunity.
One way that Monday.com looks to capitalize on this is through its growth in large customers. The company has 613 customers spending over $50,000 annually, and this grew 231% year over year in Q3. Monday.com's impressive net retention rate indicates that this number could continue to grow rapidly, and as it allows its customers to integrate data from more sources into its platform, Monday will become more valuable to its customers -- increasing its retention rate more.
The dark side of the moon
A lot of what Monday.com does might sound familiar to investors who focus on the software-as-a-service (SaaS) sector, and that is because a lot of companies have similar products to Monday. Monday faces a lot of competition from businesses like Atlassian, Asana, and Smartsheet, along with dozens of project management and software development tools that focus on specific niches.
Monday.com is nowhere near profitability, which is not uncommon for SaaS businesses but is a fact to be aware of. In the first nine months of 2021, the company lost almost $105 million, slightly more than the $103 million in the year-ago period. While this increased year over year, the company's top-line grew much faster. As a result, its net loss made up just 50% of revenue in the first nine months of 2021 compared to 93% of revenue in the year-ago period.
Is it a buy?
Monday is valued at 27 times sales, which is high, but most of its competition trades at around the same valuation. The company's impressive integrations and product simplicity provide a strong edge over some of its competition, and the ability to use it across an entire enterprise is appealing.
At these prices, I think the company could be worth buying today. This company is expensive compared to stocks outside the technology industry, so dollar-cost averaging into a full position would be a smart move. This company has seen rapid adoption from its customers, and I think its competitive advantages could allow the business to continue growing rapidly and take market share in its massive opportunity over the next five years.
