What happened
Shares of work management software company Monday.com (MNDY 2.81%) rose 40.3% in the first half of 2023, according to data provided by S&P Global Market Intelligence. The stock was actually down for the first half of the year until early May. But after it reported financial results for the first quarter of 2023, shares started surging to a market-beating performance.
In Q1, Monday.com generated revenue of $162.3 million -- far ahead of the revenue of $154 million to $156 million that management was expecting. Consequently, management raised its full-year revenue guidance from $688 million-$693 million to $702 million-$706 million.
Monday.com is maintaining adequate revenue growth for the market. Its higher full-year guidance anticipates a year-over-year growth rate of 35% to 36%. It's a steep drop-off from its 68% growth in 2022. But 35% to 36% growth is still enough to excite investors.
So what
According to Monday.com, three of its top competitors are Atlassian, Asana, and Smartsheet. Revenue growth is slowing for all four of these companies. This is natural as companies grow. But 2023 has had its own challenges for enterprise software companies.
In its fiscal third-quarter letter to shareholders, Atlassian management wrote, "The moderating growth rate of cloud revenue continues to be impacted by worsening macroeconomic headwinds."
In its fiscal first-quarter conference call, Asana management said, "The macro headwinds continued to impact our expansions and created longer sales cycles in Q1."
And Smartsheet management agreed with Asana in its first-quarter conference call, saying, "We also see the macro impacting the length of sales cycles for our larger opportunities."
All the players in this space are essentially saying the same thing: Enterprises aren't increasing their spending as much as in the past because of global economic conditions.
Monday.com isn't immune to the slowdown. Its net-dollar retention rate (a measure of existing customer spend) fell from 125% in the first quarter of 2022 to 115% in Q1. And management said what the other management teams are saying: The slowdown was "reflecting slower enterprise customer seat expansions amid the challenging macroeconomic environment."
However, even though the growth rates are slowing for all of these growth stocks (as the chart shows), Monday.com's projected growth for 2023 is still higher than that of its top competitors right now. And that's encouraging to Monday.com's shareholders.
MNDY Revenue (Quarterly YoY Growth) data by YCharts
Now what
It's also possible that Monday.com stock is surging in 2023 due to the buzz surrounding artificial intelligence (AI). In its Q1 letter to shareholders, Monday.com's management dedicated two whole pages discussing what it's doing with AI.
While Monday.com may be an AI stock, I'd caution investors from giving the company too much credit too early. AI is still a developing technology, and it's unclear how it will develop or what the monetary benefit will be.
More important to watch now is Monday.com's profitability. In Q1, its net loss shrunk considerably, and it turned operating-cash-flow positive. That's a trend that needs to continue in 2023 as the company continues to grow.
