Monday.com (MNDY -1.32%) has taken investors on a wild ride since its IPO last June. The Israeli cloud-based software developer went public at $155 per share, closed at $178.87 on the first day, then skyrocketed to an all-time high of $444.70 last November.
Monday.com initially generated a lot of buzz because it was growing like a weed and backed by Salesforce (CRM -0.15%) and Zoom Video Communications (ZM -0.33%). But as interest rates rose, the stock plummeted below its IPO price and now trades in the $130s. Does that steep pullback represent a good buying opportunity for long-term investors?
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What does Monday.com do?
Monday.com's cloud-based platform enables companies to develop their own custom applications and work management software. It also offers prebuilt "recipes" for automating various tasks, and it can be directly integrated into Microsoft's Teams, Adobe's Creative Cloud, and dozens of other popular workplace apps.
Monday.com's business model was naturally insulated from the pandemic since stay-at-home trends actually generated tailwinds for cloud-based companies that streamlined and automated their digital workflows. That's why its revenue soared 106% to $161 million in 2020, rose 91% to $308 million in 2021, and grew 79% year over year to $232 million in the first half of 2022. It's expecting 62%-63% revenue growth this year, even as it faces tough currency headwinds and enterprise customers reining in their spending to cope with the macro headwinds.
Monday.com's total number of paid customers grew 34% to 152,048 in 2021. Within that total, its number of larger customers that generated over $50,000 in annual recurring revenue (ARR) rose 200% to 793. That higher-value cohort expanded to 1,160 customers by the end of the second quarter of 2022, which represented 147% growth from the previous year.
Monday.com's ecosystem is also sticky. Its net dollar retention rate exceeded 120% in 2021 and remained above 125% throughout the first half of 2022. Its net dollar retention rate for customers with more than 10 users has also stayed over 135% throughout both periods.
But will it ever turn a profit?
Monday.com's top-line growth is impressive, but it's still deeply unprofitable by both GAAP (generally accepted accounting principles) and non-GAAP measures. On a GAAP basis, its operating loss widened from $93 million in 2019 to $151 million in 2020, but narrowed slightly to $126 million in 2021.
On a non-GAAP basis, its operating loss widened from $71 million in 2019 to $86 million in 2020, then narrowed to $53 million in 2021. But this year it expects its non-GAAP operating loss to widen to $108-$112 million as it ramps up its R&D investments in the expansion of its Work OS platform.
Analysts expect Monday.com's non-GAAP operating margins to remain negative through at least 2024. They expect its GAAP net loss to widen from $137 million in 2021 to $222 million this year.
If Monday.com's gross margins were still expanding, we could assume that it could gradually rein in its operating expenses to narrow its losses. But after rising from 86% in 2020 to 87.3% in 2021, its gross margin actually fell 40 basis points year over year to 86.5% in the first half of 2022, which suggests that its pricing power against similar platforms like Asana (ASAN -0.36%) and ServiceNow (NOW -1.22%) remains fairly limited.
The liquidity and valuations
Monday.com's slowing growth and steep losses make it a risky stock to hold as interest rates rise. However, it was still sitting on $836 million in cash and equivalents at the end of the second quarter of 2022, which only represents a 6% decline from the end of 2021. Its low debt-to-equity ratio of 0.5 also gives it room to take on more debt if its cash flow dries up.
At its peak last November, Monday.com was valued at $19.6 billion, or a whopping 64 times the sales it would generate in 2021. Today it's worth $5.9 billion, or 12 times the sales it expects to generate in 2022.
That price-to-sales ratio might seem reasonable for a company that will likely grow its revenue by more than 60% this year, but analysts expect its deceleration to continue with just 34% growth next year. If Monday.com's long-term annual revenue growth stabilizes at around 30%, then its stock still isn't that cheap -- especially when comparable cloud software companies are currently trading at single-digit price-to-sales ratios.
Monday.com will likely keep growing, but it's not a screaming bargain yet. Investors should stick with more profitable cloud stocks that are trading at lower valuations until interest rates stabilize again.
