The technology-heavy Nasdaq Composite index is up over 30% so far in 2023 thanks in large part to movements in big tech stocks such as Microsoft, Alphabet, and Nvidia. Given the investments in artificial intelligence (AI) from big tech, it's natural for investors to begin pouring into large blue chip companies. It seems as if several times a week the largest tech companies are flooding headlines with new AI-powered products and services.
In the midst of all of this are a number of growth stocks that get overlooked. This article specifically focuses on Monday.com (MNDY 2.81%), which develops project management software.
The company has made some notable progress, yet seems to lack the institutional coverage that other larger enterprises receive. Here's a thorough analysis of the company's financial and operating results that makes a case for why now could be an opportunity to initiate a position.
More than meets the eye
When it comes to workplace management, there is virtually no shortage of solutions on the market. Products developed by the likes of HubSpot, Atlassian, or Salesforce.com are dominant at both the enterprise level as well as among small and midsize businesses. The unicorn productivity application called Notion has also gained popularity in recent years.
While the market for project management software is pretty saturated, it's also fragmented. This means that while there are several different products available, many of them do not possess a full spectrum of solutions that businesses may require. In other words, much of the software out there lacks the flexibility needed to build an efficient workplace operating system, thereby forcing companies of all sizes to rely on multiple products that do not always integrate well together. This is where Monday.com really sets itself apart.
Within the Monday.com operating system, users can track myriad tasks across multiple use cases. For example, finance professionals can keep on top of investor conferences or a breakdown of expenditures by department. Sales and customer success teams can outline goals and strategies using Gantt charts or whiteboard-based collaboration tools. On top of that, employees can leverage Monday.com to monitor the status of things such as IT requests or updated contracts.
In addition, the company has created a number of applications aimed at helping software engineers monitor bugs as well as the progression of new product releases. The company's software can integrate with several developer tools including Microsoft-owned GitHub, Adobe-owned Figma, and GitLab.
While the feature list seems vast, it's a good idea to learn how well Monday.com is cross-selling its product suite. Per the second-quarter earnings call, management explained that in just the last year over 1,600 customers began with just one workplace tool and subsequently expanded to additional instances.
One of the most important key performance indicators for a software businesses is net dollar retention. Net retention is a ratio that measures revenue net of churn. If this figure is above 100%, it implies that the company is outselling any churn it's experiencing. For the quarter ended June 30, Monday.com's net dollar retention was over 110%. While impressive, consider that net dollar retention was over 120% for customers that had more than 10 users. The strong retention in power users when compared to the company's entire customer base is encouraging.
Unsurprisingly, the successful customer metrics have translated to robust revenue growth and margin expansion. Monday.com increased revenue 42% year over year during the second quarter of 2023, reporting total sales of $176 million. Moreover, the company's free cash flow was $46 million in Q2, representing a 26% margin. This marked a 2% expansion in free-cash-flow margin and a massive improvement over Q2 2022 when the company was not yet cash-flow-positive.
Image source: Getty Images.
Should you buy the stock?
MNDY PS Ratio data by YCharts
The chart above reflects the change in price-to-sales (P/S) ratios and market capitalization among a cohort of workplace productivity tools including Atlassian, Salesforce.com, HubSpot, Asana, and Monday.com.
Interestingly, each company in the analysis has witnessed an increase of at least 30% so far this year, except Monday.com. And while its market cap has increased over 50% year to date, this is actually toward the bottom when compared against the other names. Given the company's impressive growth in both revenue and free cash flow, as well as its proven ability to cross-sell products and retain customers, it's a little unusual that the stock isn't priced at a premium to its competitors.
My thesis hinges on two key points: customer demand and brand awareness. Given the significant moves among Monday.com's cohorts, I believe demand for workplace management software is operating at a high level. The market is filled with a variety of solutions and the competitive landscape is tough. For this reason, I feel that given Monday.com's size relative to some of its peers, the company is still making a name for itself.
I think that Monday.com is a solid business that continues to operate under the radar. Should the company continue to generate strong growth, it's only a matter of time before it could be more of a mainstream player in the business. I think now is a unique opportunity to start a position in the stock, and dollar-cost average over a long-term time horizon.
