Enterprise software company Monday.com (MNDY 3.27%) recently wrapped up its fiscal 2021 year, posting its fourth-quarter earnings results. Investors responded by sending Monday.com shares more than 20% lower, pushing the stock to new all-time lows.
But does the stock market always act rationally? The market itself is full of fear and negative sentiment at the moment, after all. Before looking past Monday.com as a potential investment, consider several observations from the company's quarter that could illustrate that things are better than the market's reaction would indicate. Here are three key takeaways from Monday.com's fourth quarter.
First, what is Monday.com?
Monday.com describes itself as "workplace OS," with a mission statement of "changing the way that people work and businesses operate." It's a software company with low-code and no-code tools to create customized dashboards and systems on which other companies can run their business.
Most people rely on tools like spreadsheets and canned software products to track their sales and coordinate projects. Monday.com's product wants to offer a better way to mold a company's operating activities around its specific needs. Monday.com sells its product under a subscription model, making its business model a SaaS (software-as-a-service) product.
Monday.com's top-line numbers appeared strong; revenue came in at $96 million, earnings per share were a negative $0.26, and both figures topped analyst estimates. However, some key items stood out more than these headline numbers.
#1: Revenue maintaining hyper-growth pace
The company's Q4 revenue grew 91% year-over-year to $95.5 million, and full-year growth was also 91%, hitting $308 million. This puts Monday.com's three-year revenue growth rate at 99% per year from 2019 to 2021. It's not easy for a company to double its sales every year, but Monday.com is finding a way.
With that said, the company's guidance for 2022 is calling for a deceleration in growth. Management set estimates at $470 million to $475 million, a year-over-year increase of 54%. This could explain the market's stock punishment, but some indicators show that actual performance could come in a bit higher than this guide.
#2: Customer spending is strong where it counts
Customers are spending more money on Monday.com, helping drive revenue growth. Businesses that pay $50,000 or more on Monday.com's platform grew 200% year-over-year for the quarter, showing the platform's ability to grow within a company as more people within an organization rely on it.
The increase in large customers also bumped its net revenue retention rate (NRR), which measures how much existing customers are increasing or lowering their spending. The NRR was already strong at 130% for companies with ten users or more, but increased to 135% in 2021 Q4.
#3: Financials are improving
Monday.com isn't profitable yet, but the company's financials are improving. The business itself is now cash-flow positive, generating $9.9 million in free cash flow in 2021, about three percent of its revenue. Gross margins are approximately 90%, so investors should look for revenue to begin outrunning expenses moving forward, and free cash flow should start to grow as a result.
Generating free cash flow is a positive step toward profitability and reduces the company's chances of issuing new shares to raise funds, diluting investors in the process. The company has $887 million on its balance sheet, so there's capital to pay for growth efforts.
Verdict: buy the dip
If you're looking at the long-term horizon, there's a lot to like in Monday.com's performance, and the company seems like it's growing its top line while also improving its bottom-line margins. More than 152,000 customers now use Monday.com, giving the company a large customer base to sell to as it innovates and brings new features to its platform.
Does this sound like a stock that should be trading at its lowest prices since going public? I don't think so, but here we are -- the stock is trading at 52-week lows. At a price-to-sales ratio of less than 18, the stock has become very reasonable for the long-term value investors could be getting.
Monday.com's beaten revenue estimates in both quarters since going public. Still, even if it only manages to meet its 2022 guidance, there could be room in the stock's valuation to reflect that growth as investment returns, making Monday.com a stock to consider buying the dip on.