Monday.com's (MNDY -0.68%) share price has been incredibly volatile since its summer 2021 IPO. However, the the software company's price bottomed out in late 2022, and over the last 12-month stretch, solid business progress has had the stock continuously on the rise, with shareholders enjoying a more than 50% rally.
Management is touting new products for its small enterprise platform, and it's making progress toward profitability. Shares aren't cheap, but Monday.com could still have much to offer long-term investors.
Expanding the platform
Monday.com's core software product is for work and project management, helping users on business teams track and complete daily tasks. This puts Monday.com in competition with sizable businesses like Atlassian, Asana, and Smartsheet -- not to mention big enterprise software providers like Microsoft.
One of Monday.com's key competitive features from the get-go was its level of product customization. Clients can use Monday.com's no-code platform to make their own workflow apps. No knowledge of software coding is required -- the creation process is just pointing and clicking. Management has been leaning into this customizable software approach and expanding the number of supported use cases -- like customer relationship management (Salesforce's core product), more complex database and software development tools, and artificial intelligence (AI) chatbots.
In the first quarter, revenue grew 34% year over year to $217 million, well above management's guidance range three months prior. Management also boosted its full-year revenue guidance to a range of $942 million to $948 million, which would amount to growth of 29% to 30% (the previous guidance range was for 27% to 28% growth).
Monday.com's playbook will look familiar to investors in subscription-based software-as-a-service (SaaS) companies. The biggest software companies in the world started in a niche, then kept adding more services over time to expand and bolster their competitive advantages. Monday.com's story is no different so far, and it is leading to some impressive revenue figures.
Data by YCharts.
Building a sustainable enterprise software ecosystem
Of course, as SaaS investors were reminded during the bear market of 2022-23, profitability is also important. As a young and growing tech company, Monday.com hasn't been focused on the bottom line for long. In Q1, it booked a GAAP operating loss of $5 million. It was only in the green on GAAP net income -- to the tune of $7.1 million -- due to the interest income it collected from its massive cash and equivalents balance. However, free cash flow, which backs out non-cash expenses such as employee stock-based compensation, was $89.9 million -- giving it a healthy free-cash-flow profit margin of 41%.
Shareholders should expect the free cash flow margin to moderate through the rest of 2024. Management's forecast implies a margin of 25% to 26% for the year. Still, Monday.com is making exceptional progress on profitability, all while growing its top line at a rate north of 30%. This could be a fantastic compound growth stock for years to come.
One thing that could potentially be a big help in sustaining the momentum is its aforementioned massive cash hoard -- $1.22 billion at the last report -- and its lack of debt. The company has ample liquidity to eventually make an acquisition, or simply keep creating new products organically.
Shares of Monday.com now trade at 45 times the trailing-12-month free cash flow. That's certainly not a value stock figure, as it bakes in the assumption of fast growth for at least a few more years. But for a business that has scaled from close to no free cash flow at the start of 2023 to a healthy profit margin today, it certainly doesn't look like an egregious valuation either. The best could be yet to come for Monday.com's shareholders.
I'm happy to hold onto my position in this top cloud software stock and will nibble on it a bit more later this year.
