Monday.com (MNDY +0.35%), an up-and-coming software-as-a-service (SaaS) company, has many traits that investors like.
It delivered solid growth in the last few years, with revenue surging from $78 million in 2019 to $730 million in 2023 -- a 65% compound annual growth rate. Yet analysts think that the company has just gotten started, and expect significantly more growth in the future.
Still, there are significant risks investors ought to consider before making a decision about whether to buy shares of this company.
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The sustainability of Monday.com's hypergrowth
Analysts are generally optimistic about Monday.com's SaaS business model, which generates high recurring revenue. On top of that, investors expect the tech company to deliver hypergrowth rates for many years thanks to its large addressable market.
According to forecasts by IDC, Monday.com's total addressable market was $101 billion last year, and is expected to expand to $150 billion in 2026. With an annual revenue of $730 million in 2023, it hasn't even tapped 1% of that opportunity.
But here's the thing: While Monday.com successfully expanded at rapid rates from its previous much smaller size, there is no guarantee that it will be able to replicate that at its current scale. Competition is intense in this market, with leading players such as Asana, Trello, and Smartsheet working to grow their footprints. So while the opportunity may be huge, it won't be an easy ride.
Besides, the company has historically focused on small and medium-sized businesses as its core customers -- and attracting those types of businesses generally requires minimal marketing efforts. However, it is widening its gaze to target larger customers -- mid-market and enterprise-level companies -- and will need to invest significantly more time and capital in attracting and retaining them. There is no guarantee that it can achieve the same level of success in this segment -- currently, it has less than a 1% average penetration within Fortune 500 companies.
Above all, Monday.com's previous rapid growth makes it almost inevitable that its growth rate will decline. For instance, in 2020, its revenue rose by over 100% to $161 million. That year, it only had to add $81 million in sales to more than double its top line. But its growth rate fell to 34% in Q1 2024, when its year-over-year gain was $55 million just for one quarter. So, though it's gaining ground faster on a dollar basis, when measured as a percentage of its now much larger business, its growth rate has slowed.
In short, while Monday.com could continue to grow for a while, there is a significant chance that its revenue growth rate will further decline from here.
NASDAQ: MNDY
Key Data Points
Monday.com trades at a high valuation
The other primary concern about Monday.com is its high valuation. As of this writing, the stock trades at a price-to-sales (P/S) ratio of 14. While that's below its five-year average of 20, it remains high compared to other leading technology companies. For instance, Alphabet trades at a P/S ratio of 7.
Given their vast runways for potential growth, the conventional wisdom is that high-growth tech companies like Monday.com deserve to trade at high valuations. And judging from the company's prospects -- it has less than 1% of its total addressable market -- it seems rational for investors to pay a high price for the stock.
But here's the problem with that approach: If Monday.com fails to deliver as much growth as expected -- even just for one quarter -- investors could temporarily or permanently rerate the stock to a lower valuation. Short-term reratings create serious volatility in investors' portfolios, while more durable downward revisions in how the market values a company permanently impair investors' capital.
For example, Monday.com stock traded at a P/S ratio of as low as 7 at times during the last five years, and while it has recovered partially from those lows, it is still significantly below its peak ratio of 64. And there is no guarantee that it can sustain its current valuation level since it's still very much on the high end among tech companies.
What it means for investors
Investors are always looking for businesses that could become the next Amazon -- companies that can grow at high rates for many years, delivering outstanding investment returns. Still, investors should avoid getting overly excited about even promising businesses -- very few companies will ever be as successful as Amazon.
In other words, while Monday.com has demonstrated a solid growth track record, it's unclear whether that trajectory is sustainable in the long run. Besides, the tech company trades at a valuation that makes it dangerous for conservative investors to buy.
When all is said and done, owning this stock is not for the faint of heart. Investors should carefully consider their risk tolerance before putting their hard-earned capital into Monday.com.
