Shares of project management software company Monday.com (MNDY -0.22%) fell close to 30% this week, according to data from S&P Global Market Intelligence. It reported earnings for the second quarter, posting strong revenue growth but still disappointing investors.
As of 12:23 p.m. ET on Friday, Aug. 15, Monday.com stock is down 28.8%. It is currently off 60% from all-time highs set in 2021.
Strong growth, high expectations
On Aug. 11, Monday.com reported its quarterly results for the three months ending in June. Revenue grew 27% year over year to $299 million, as more and more customers adopt its project management software. However, this is a slowdown from previous quarters, where Monday.com was growing sales at north of 30% a year.
Getting more granular, Monday.com reports some figures that are important for an enterprise software provider. Customers with more than $100,000 in annual spending with Monday.com hit 1,472 in Q2, up 46% year over year. This is an important figure because of how durable and reliable software revenue can be from large businesses. If they choose Monday.com for workflow management, it is likely that they will stick with the company for a long time.
So why did Monday.com stock fall? Likely due to continued slowing revenue growth and negative operating earnings. Investors have high expectations for this company, given its valuation, and would like to see it generate a profit. The company had a generally accepted accounting principles (GAAP) operating loss of $11.6 million in the period due to high levels of stock-based compensation.
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Should you buy Monday.com stock?
In a 60% drawdown, Monday.com stock is cheaper but not overly cheap for investors interested in buying today. In order to value the software company, we can use the price-to-sales ratio (P/S) to help estimate future profitability versus the current market capitalization.
Today, Monday.com trades at close to a record low P/S of 8.4. It has 90% gross margins, meaning that the company will likely be able to convert a ton of its revenue into operating earnings as it stops aggressively spending on marketing and product development. It is still growing rather quickly, even if the revenue growth rate has begun to slow down a bit.
With $1.1 billion in trailing-12-month revenue, let's assume that at scale, Monday.com would have a net income margin of 30%. That equates to $330 million in annual net income. Compared to a market cap of $9 billion, that is a price-to-earnings ratio (P/E) of 27, which does not look expensive for a company growing this quickly.
If you believe in the growth story for Monday.com, now may be a good time to start a position and buy some shares of this stock.
