Monday.com Stock Deserves a Second Look as the Fed Signals an Interest Rate Hike Slowdown

Shares of Monday.com (MNDY 2.15%) have not been spared by the bear market of 2022. The stock has fallen 65% this year, getting little reprieve even as the adaptable software platform continues to put up blistering growth.  

With interest rates on the rise (which lowers the present value of stocks), investors have become hyperfocused on profitability. Monday.com doesn't generate profits right now, at least not without a few adjustments. But after getting a big reset, this software company is worth another look as the U.S. Federal Reserve has begun to hint that interest rate hikes could start to slow going forward.

Winning big with large customers

Monday.com provides flexible business and customer relationship management software that can be customized by just about anyone -- even those without knowledge of how to code. When it had its IPO in 2021, the company made headlines for its triple-digit percentage growth, as well as drawing sizable investments from cloud software peers Salesforce (which is also a competitor to Monday.com) and Zoom Video Communications.  

But 2021 was a different era. These days, investors are concerned with the Fed's interest rate policy aimed at bringing down inflation, and a resulting economic slowdown (and perhaps even recession) headed into 2023.

Nevertheless, Monday.com has remained a resilient growth stock. Revenue expansion has slowed this year, but growth still hit 65% in the third quarter, or up 68% when excluding currency exchange rate headwinds -- a side effect of those Fed rate hikes. This result is being driven by a 116% year-over-year increase in large customers that spend at least $50,000 per year with Monday.com.  

With three quarters of 2022 in the books, Monday.com's results are impressive given the economic situation out there, especially in important markets like Europe where war and an energy crisis are weighing heavily on business sentiment.

Data source: Monday.com.  

Is Monday.com stock a buy?

To cap off 2022, management said it expects revenue to increase another 47% to 49% year over year in the fourth quarter. It's a slowdown, sure, but this software company is still a hypergrowth stock.  

The bad news is that Monday.com will still operate at a loss, both on an unadjusted net income basis and on an adjusted basis -- though free cash flow remains not too far off from positive territory. In fact, quarterly free cash flow was indeed positive at $14 million last quarter. The difference between free cash flow and those net losses is primarily non-cash stock-based compensation to employees, which tallied up to $80.5 million so far in 2022.  

If a company that generates robust profitability is what you're interested in, you can safely pass on Monday.com for now. Though the market is holding the feet of loss-generating companies to the fire, Monday.com clearly is on to something with its brand of easy-to-customize business management software. If stock-based compensation helps it keep expanding at a rapid pace, it might be worthwhile long-term, assuming it can reduce that non-cash expense in time and eventually reach robust profitability. 

In the meantime, Monday.com has a stellar balance sheet with $853 million in cash and equivalents and zero debt.  

And as unsavory as stock-based compensation may be to some investors, it's not like Monday.com isn't showing signs of being able to generate positive value to shareholders. Since the IPO, revenue on a per-share basis (which includes the negative effects of stock-based compensation) is up nearly 150%.  

Data by YCharts.

For now, though, as long as Monday.com is losing money, this cloud software stock should be viewed as a high-risk -- and potentially high-reward -- investment. I'd advise investors to tread lightly. However, the company is holding up well in the face of a possible recession and rapidly rising interest rates. That's worth something. If you're a software company investor, Monday.com is worth keeping an eye on.