Shares of work collaboration software company Monday.com (MNDY 2.81%) have rocketed nearly 140% higher in the seven months since hitting their low in mid-Nov. 2022. Not for poor reasons, either. Despite a hypercompetitive niche that includes large enterprise software company Atlassian and fellow upstart Asana, Monday.com has continued to grow its business at a rapid pace.
Better yet, Monday is also quickly scaling its profitability, which makes it a promising long-term stock. But is now the time to buy, despite the big surge in share price so far in 2023?
Monday.com shakes off the cloud's "case of the Mondays"
Monday.com's software provides a customizable interface that lets teams organize their workflows and collaborate with each other. This would seemingly be a tough sell right now, what with all things cloud software growth slowing down dramatically this year. With organizations worrying about a possible recession in 2023, many customers (potential and existing) are tapping the brakes on expanding their use of the cloud for the time being in an attempt to conserve cash.
But Monday and its operating system (which it sees as a foundational piece of software from which to begin and organize the workday) are still firing on all cylinders. After growing revenue by 68% in 2022, Monday kicked off 2023 with a 50% year-over-year increase in Q1 revenue to $162 million.
This also prompted an increase to full-year 2023 expectations. Revenue is now expected to rise between 35% and 36% (up from the previous outlook of 33% to 34%) from 2022.
Compared to recent results from Asana and Atlassian, Monday.com certainly seems to have caught on with its business customers.
Data by YCharts.
New products are helping fuel growth and filling the company's pipeline of new deals. Management highlighted its new database tool, mondayDB, which should especially help software developer teams. And customer relationship management software mondayCRM is also picking up steam. mondayCRM accounts more than doubled in Q1 from the previous quarter, to 5,441.
And with artificial intelligence (AI) all the rage right now, of course Monday discussed its own work in this buzzy area in its Q1 shareholder letter. The monday AI Assistant launched in May to help automate user tasks as well as streamline Monday.com's own internal workflow. The company will soon be opening up its platform to third-party developers, who will be able to create new AI apps on Monday's software platform.
But what about the stock?
All of this software work translating into revenue growth is fine, but that doesn't automatically make Monday.com stock a buy right now. On the basis of generally accepted accounting principles (GAAP), the company isn't profitable yet -- although it's making fast progress. GAAP net loss was $14.7 million last quarter, compared with a $66.7 million loss the same quarter a year ago.
Employee stock-based compensation is also still high at $22.5 million in Q1, although that too is now falling (it was $23.7 million in Q1 2022).
As a result, Monday.com is showing incredible promise as a highly profitable and growing software business. Free cash flow was an impressive $38.7 million in Q1 (a very healthy free cash flow profit margin of 24%), compared with negative free cash flow of $16.2 million in the year-ago quarter.
Oh, and a balance sheet with $935 million in cash and short-term investments, and zero debt, certainly doesn't hurt.
But here's the thing: Wall Street analysts are forecasting Monday.com will generate about $73 million in free cash flow in 2023. I think this is a bit conservative given the Q1 results. But at any rate, using this consensus prediction, Monday.com stock trades for over 100 times on an enterprise value (market cap minus cash and investments) to free cash flow basis. Suffice to say, it's a steep price tag that anticipates this business rapidly scaling up its profitability for years to come.
Monday.com was a much better "value" three months ago. I'm content with the small position I have in the stock at the moment and won't be adding more right now. However, it's clear this cloud software company has momentum and is building a sustainably profitable business that will be worthy of investment if it can keep up its progress. Keep Monday.com on your radar.
