Is It Too Late to Buy Monday.com Stock?

Monday.com (MNDY 2.81%) posted its second-quarter report on Aug. 14. The Israeli cloud software company's revenue rose 42% year over year to $176 million and exceeded analysts' expectations by $6 million. It generated an adjusted net profit of $21 million, compared to its adjusted net loss of $15 million a year earlier, while its adjusted EPS of $0.41 cleared the consensus forecast by $0.21.

Those headline numbers were impressive, but Monday.com's stock price has already rallied nearly 40% this year. Is it too late to pick up some shares of this hypergrowth stock?

Image source: Getty Images.

Its growth rates are gradually cooling off

Monday's cloud-based platform enables organizations to develop their own custom work management apps to accelerate and automate certain tasks. These apps can either be built from scratch or generated through pre-built "recipes," and they can be directly integrated into an organization's existing software applications. The market's demand for Monday.com's services is booming as companies seek out fresh ways to digitally transform their businesses and optimize their spending. It went public just over two years ago, and its revenue soared 91% in 2021 and 68% in 2022.

But over the past year, its growth in total revenue, larger customers that generate at least $50,000 in annual recurring revenue (ARR), and net dollar retention rates (NDR) for those larger customers have all gradually decelerated.

Data source: Monday.com. YOY = Year over year.

Like many other cloud software companies, Monday.com blamed its slowdown on the macro headwinds which throttled enterprise spending on big software upgrades. It expects that deceleration to continue with 32% to 34% year-over-year revenue growth in the third quarter and 37% to 38% revenue growth for the full year.

But looking ahead, the secular growth of the work management app market, the expansion of its Monday AI platform (which integrates AI features into its apps), and a warmer macro environment could stabilize its long-term growth.

Its margins are improving

After Monday.com went public, the bears pointed out that it was still deeply profitable by both generally accepted accounting principles (GAAP) and non-GAAP measures and that its adjusted free cash flow (FCF) was deeply negative. However, its adjusted operating and FCF margins both turned positive over the past year as it reined in its spending.

Data source: Monday.com.

For the third quarter, Monday.com expects its adjusted operating margin to dip sequentially (but expand year over year) to 2% to 3%. For the full year, it expects to post an adjusted operating margin of 3% to 4%, compared to a negative 9% in 2022.

On a GAAP basis, Monday.com narrowed its net loss year over year from $112 million to $22 million in the first six months of 2023. Analysts expect it to narrow its full-year net loss from $137 million in 2022 to $59 million in 2023.

All of those bottom-line improvements -- along with its commitment to keeping its gross margin in the "high 80s" in the medium to long term (compared to 89% in 2022) -- suggest it operates a more sustainable business model than many other hypergrowth cloud companies.

But is it too late to buy Monday.com's stock?

With an enterprise value (EV) of $6.9 billion, Monday.com trades at 10 times this year's sales. That's still a reasonable EV/revenue ratio for a cloud software company that is growing its revenue by 30% to 40% annually with expanding margins.

By comparison, the cloud-based digital workflow services provider ServiceNow -- which is expected to generate 23% revenue growth this year -- trades at 13 times that estimate. Snowflake -- the cloud-based data warehousing company that is expected to generate 34% revenue growth in its current fiscal year -- trades at 17 times that forecast.

Therefore, it isn't too late to buy Monday.com's stock, which remains more than 60% below its all-time high from November 2021. It might not revisit those record levels anytime soon, but it's still a promising long-term play on the cloud software market.