Bull and bear markets exercise their influence to raise and lower share prices. But Wall Street eventually sniffs out the genuinely excellent companies and appropriately pushes that stock's price higher. The key for investors is finding these winners before the market gets wise to them.
January ended up being a solid month for many technology and growth stocks, a sign that the headwinds of this current bear market might finally be easing to allow for the next market cycle upward. When that time comes, enterprise software company Monday.com (MNDY 2.81%) might just be among the stocks leading the pack.
Here's what makes Monday.com genuinely excellent and why the stock is attractively priced today.
People are a company's most significant investment
According to a 2020 report on the State of Talent Optimization from the Predictive Index, an average U.S. company spends 64% of its total expenses on labor. That suggests people are a crucial investment for every business. It also suggests that maximizing a company's return on its talent is critical to business results.
Monday.com describes itself as a next-generation work OS (operating system). It's cloud-based project management software that lets enterprises create no- and low-code software dashboards, reports, and applications to help employees communicate and work together. The company offers work management software for projects and CRM for customer-facing employees.
Despite the competitiveness of enterprise software, which includes direct competitors like Asana, Monday.com's management states that it doesn't face competition in 70% of its deals. That implies a significant market opportunity, and its product offers a strong value proposition to customers. Today, Monday.com has 1,323 customers spending $50,000 or more, helping drive $464 million in trailing-12-month revenue.
Strong growth with little financial fallout
Growth is typically the goal of any young company, but growth at any cost can backfire. Fortunately for shareholders, Monday.com is managing strong growth without burning too much cash in the process. You can see below that Monday.com's revenue growth has slowed as the numbers get larger; that's understandable, and it could accelerate again if economic sentiment improves. Many companies (evidenced by layoffs across Wall Street) are wary of the economy now and could be hesitant to invest heavily in new products.
But just as importantly, you can see that Monday.com has managed its losses well, growing while burning minimal cash. Cash losses are just $11 million over the past year, which means that Monday.com is virtually breakeven on a cash basis.
MNDY Revenue (TTM) data by YCharts.
Monday.com's balance sheet is solid; management is sitting on $852 million against zero debt, so the minimal cash losses give the company plenty of options for a potential acquisition if the right opportunity comes along. Otherwise, there's plenty of cash to invest in product development and marketing.
The stock still has a reasonable price tag
Monday.com went public in the summer of 2021 amid the peak of a euphoric bull market. It shouldn't be surprising that the stock's valuation, which peaked at a price-to-sales ratio (P/S) of 64, didn't hold up when the market cooled. Shares fell as low as a P/S ratio of 7 and currently trade at 13, compared to its average of 25 since its IPO.
MNDY PS Ratio data by YCharts.
The wild market swings over the past couple of years mean it could take time for the market to settle on a long-term valuation for software stocks like Monday.com. The good thing for investors is that the stock doesn't need a dramatically higher valuation from its current P/S ratio because the company's still rapidly growing. Management will soon close out 2022 with fourth-quarter earnings, guiding for 65% revenue growth for the full year.
Investors might see growth slow if the economy gets bumpy, but it's hard not to be excited about long-term growth prospects. With a growing base of enterprise customers, a lack of competition in deal-making, and a 120% net revenue retention rate showing customers spend more over time, Monday.com should remain in the growth stock category for some time. That makes it a potential winner for the next bull market run.
