Shareholders of workflow management software company Monday.com (MNDY 2.81%) got good news Monday morning when the company released quarterly results. Revenue was $176 million, an easy beat of the $170 million management forecast a few months ago and up 42% from the year-ago quarter.
While Monday.com shares remain far off of their ludicrous highs of the cloud stock bubble of 2021, this small company is actually doing quite well these days. As of this writing, the stock is up 20% over the last 12-month stretch and up 35% so far in 2023. Stocks of upstart peers like Asana (NYSE: ASAN), and incumbents like Atlassian (NASDAQ: TEAM) and Smartsheet (NYSE: SMAR), have underperformed Monday.com by a wide margin over the past year. Monday.com appears to have a winning formula, but is now the time to buy?
New products, but what's the real secret ingredient?
Monday.com has been a hot growth business since its 2021 IPO. It's been able to pick up lots of customers touting its easy-to-use software-building capabilities, which give users the ability to customize the software suite to their needs. Additional features have been coming in fast, including a new database architecture called MondayDB (which opens up new use cases, especially for customers with big and complex workflow problems) and an AI assistant.
All of these features no doubt have kept new customer acquisition and existing customer expansion going strong. A free-to-use tier certainly doesn't hurt either. But I posit that what really has investors excited is the company's ability to drive profitable growth, especially on a free cash flow basis.
You see, Atlassian has been stuck in a free cash flow rut as it has been making its migration to the cloud in recent years. Asana is an egregious example of cash-burn. And Smartsheet should really be more profitable than it is, given it's been around for nearly two decades.
Data by YCharts.
Meanwhile, Monday.com has been rapidly pivoting from grow-at-all-cost to grow-profitably mode. While revenue growth is slowing down (more on that in a moment), it's still expanding quickly. But costs are being held in check. And even on a GAAP profitability basis, this company is almost in the black. GAAP net losses were shaved down to just $7 million in Q2, compared to nearly $46 million last year.
Free cash flow in the last quarter was $46 million, with the net loss mostly attributable to employee stock-based compensation of $29 million -- a figure that is now falling on a year-over-year basis. Monday.com ended June 2023 with $989 million in cash and short-term investments and zero debt, a stellar balance sheet for a small growth outfit.
Is it time to buy?
It's still early on in its story, but this star is showing signs of being a solid profit-compounder, assuming management can keep the business on its current trajectory. Speaking of trajectory, given the great Q2 performance, a full-year 2023 outlook upgrade was provided. According to the company, revenue is now expected to be in a range of $713 million to $717 million (versus $702 million to $706 million before), implying growth of 37% to 38% over 2022.
Bear in mind this rate of revenue growth is below the rate just reported for Q2. But that makes sense. the economy is still showing signs of stalling in 2023, and customers are pausing some of their spending plans. Like other cloud software companies, Monday.com is flagging this as the reason for its cool-off. Only time will tell if a faster pace can be achieved (maybe in 2024) when some of the current concerns start to wane.
I'm not going to complain much about a company that's still forecasting close to 40% year-over-year expansion. However, investors mulling a position in this stock may want to mind the risks here, especially when it comes to overpaying. After all, with Monday.com only just beginning to generate positive profit metrics, that still isn't a reliable valuation method -- though that could change very quickly if management is able to continue scaling free cash flow as quickly as it has been as of late.
But for now, know that Monday.com carries a premium valuation of nearly 12 times revenue expected in the current year. Over time, once it becomes robustly profitable, this metric will become meaningless, but it's the best measure investors have at the moment. Monday.com has been growing faster than its peers, so it deserves a higher price tag, but further deceleration of its expectations could cause the stock to go haywire in the wrong direction.
Data by YCharts.
Given this information, I continue to just nibble a bit on this stock from time to time. It's a very small position in my portfolio, and I don't expect that to change anytime soon. The company will need to prove its merits over time for me. Prudence is a good strategy with stocks like this for most investors. If you like the Monday.com story so far, consider using a dollar-cost average plan to accumulate shares.
