Cloud software company Monday.com (MNDY 2.81%) delivered a great update to close out 2023, and indicated good things could be in store for 2024. Bear market or not for the cloud industry, this small platform kept growing at a fast pace, helped by the rollout of new AI products along the way.
Management is making a slight pivot, though, as it appears the bear market is now history. After the briefest of dips in the stock price, Monday.com is once again close to its high-water mark after the market downturn of 2021 and 2022. Is this aspirational AI software provider a buy?
2023 was good. But what about 2024?
Monday.com is still a tiny software business, especially in the grand scheme of the software industry. When you compete against titans that haul in tens of billions of dollars in a single quarter, not to mention other providers of relationship and project-management software, what's $730 million in revenue in a year?
At any rate, the company is making some small ripples in the market. Revenue grew 41% in 2023, including a 35% year-over-year increase in the fourth quarter.
A bunch of product launches helped. MondayAI, powered by Microsoft and OpenAI's algorithms, is now available to power all sorts of uses across Monday's flexible suite of customizable software. MondayDB -- a database tool that allows more flexible use of data ported over to Monday's relationship management, software development, and planning features -- is also slowly being rolled out.
Other products are coming to market soon, like "Monday code," which allows developers to run their own custom apps within the Monday.com ecosystem. All on its own, AI and other products aren't going to move the needle. But taken together as a whole, they strengthen the Monday.com platform as management gears up for its next wave of innovation and growth.
This brings us to the company's profitability metrics. Value investors looking for positive numbers under generally accepted accounting principles (GAAP) won't find them at this point. The business is just too young, and expansion is the top priority.
But free cash flow (FCF) was $205 million in 2023, for an FCF profit margin of 28%. Amid the big stock market downturn, that appeased shareholders. But now that the bear market is over, management will again be pouring more cash into research and development (R&D). Expect FCF margins to dip to 22% in 2024.
Is Monday.com stock a buy for 2024?
For full year 2024, the initial outlook for revenue is about 27% to 28% growth to at least $926 million. Based on that aforementioned FCF margin of 22% (or FCF profit of about $204 million), and a current market cap of $10.8 billion, Monday.com stock now trades for about 53 times expected 2024 free cash flow.
By further factoring in the $1.12 billion in cash and short-term investments and no debt, the company trades for about 48 times enterprise value to expected 2024 FCF.
This is a premium price, to be sure. It reflects the business' enduring growth and expectations that such growth will continue for many years. It also factors in the FCF margins falling as the company ratchets up its R&D again now that the bear market is over.
To put it bluntly, aggressive expansion like this means Monday.com isn't a stock for everyone. The growth trajectory is great, but any further slowdown in that rate of growth, paired with a lack of GAAP profitability, will make this a very volatile stock in the years to come. Monday.com is flying high right now, but not even AI products will save this one from some wild swings up and down.
I for one am a happy shareholder, but it's a small position in my portfolio. I'll keep an eye out for a sizable pullback to buy more shares. For investors who like the long-term potential of this cloud software player as it goes against industry giants, consider using a dollar-cost average plan to build up a position gradually.
