Have you ever been sitting at your desk and received an unsolicited email from a sales rep trying to schedule a meeting with you to demo their new widget? This happens to me several times per week.
As someone who is in charge of several different projects at once, I'll admit that the trusty "to-do" list with a pen and paper simply doesn't cut it anymore. There are too many moving variables for each project and lots of people involved. The challenge of keeping an organized project roadmap is real.
This is where workforce management tool Monday.com (MNDY -1.38%) comes into play. From project management to customer relationship management (CRM) for your sales pipeline, Monday.com's robust suite of products covers its users needs.
The company just reported earnings for the first quarter of 2023, and investors cheered. In this article, I will analyze the company's Q1 results and determine if now is a good time to buy the stock.
How were Monday.com's Q1 results?
For the quarter ended March 31, Monday.com posted revenue of $162 million, which represented a 50% year-over-year increase and smashed Wall Street expectations. Furthermore, the company demonstrated a disciplined cost structure throughout Q1, illustrated by its muted operating expense growth.
The company actually cut marketing expenses year over year by about 7%, but still managed to generate a healthy result on the top line. On the other side of the equation, research and development costs increased 42% year over year, which management addressed during the earnings call. The company is focused on developing new products and services and explicitly stated that it plans to continue hiring for these roles throughout 2023.
Perhaps the most exciting financial tidbit from Q1 results was the company's profitability profile. The earnings release showcased that operating cash flow was $43 million, while free cash flow was $39 million. To put this into context, operating cash flow was $13 million, and free cash flow was negative $16 million during the first quarter of 2022.
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What else should be considered?
Monday.com is considered a software-as-a-service (SaaS) business. Generally speaking, SaaS businesses tend to call out non-GAAP (adjusted), industry-specific key performance indicators such as annual recurring revenue (ARR), or net dollar retention (NDR), neither of which are explicitly found in SEC filings.
ARR is an important metric to study because it quantifies recurring revenue, which typically carries a higher margin than non-recurring revenue. According to its investor presentation, Monday.com ended Q1 with nearly 1,700 customers that pay at least $50,000 in ARR. This represents 75% year-over-year growth in enterprise accounts for the company. While this is encouraging to see, there are some things to look closer at with these enterprise accounts.
Net dollar retention measures ARR net of churn. For example, if the ratio is above 100%, it implies that the company is outselling any churn it experiences. Per the investor presentation, Monday.com's Q1 NDR was over 115%. To be blunt, this is an exception. However, the company's NDR was over 125% at the end of Q1 2022. Moreover, NDR within just its enterprise customer cohort was roughly 125% in Q1 2023 compared to 150% in Q1 2022.
Management addressed the NDR pressure and attributed the churn to a volatile macroeconomic environment. Throughout 2023, investors have seen even the largest, most established technology behemoths tighten their belts on corporate expenses. For this reason, I would not spend too much time worrying about Monday.com's churn or exposure to most disciplined cost structures.
Should you buy Monday.com stock?
Monday.com trades for roughly $165 per share, which is just below its 52-week high. In the past two weeks alone, the stock is up roughly 30%.
Since Monday.com is not yet net income-positive, the price-to-earnings (P/E) ratio is not particularly useful. By contrast, the company trades at nearly 13 times its trailing-12-month sales (P/S). As a rule of thumb, investors should compare valuation ratios among companies in similar cohorts.
For Monday.com, some reasonable comparable companies could include Asana and Atlassian. Both Atlassian and Asana operate in the workforce management space, and Monday.com sits in the middle when comparing the revenue base among the three companies.
Asana's P/S is roughly 6, while Atlassian's is 10. Even though it appears that Monday.com may be trading well above its peers, it should be considered that the company is growing much faster than Asana and Atlassian, which are growing revenue at 45% and 24%, respectively.
While now is probably not the right time to lower your cost basis or initiate a position, investors should keep an eye out for any sudden drops. Monday.com has proven that its products are in demand, and the company has demonstrated that it can generate robust operating results. The stock could be a long-term winner for patient investors.
