Monday.com (MNDY 4.42%) has taken investors on a wild ride since its IPO last June. The Israeli cloud-based software developer went public at $155 a share, closed at $178.87 on the first day, then rose to an all-time high of $444.70 in November.
Monday.com initially generated a lot of buzz because it was growing like a weed and was supported by Salesforce (CRM -3.43%) and Zoom Video Communications (ZM 0.78%). But as interest rates rose, the stock fell below its IPO price and now trades in the $130s. Does the steep pullback represent a good buying opportunity for long-term investors?
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What does Monday.com do?
Monday.com’s cloud-based platform enables companies to develop their own custom applications and work management software. It also offers prebuilt “recipes” for automating various tasks, and it can be directly integrated into MicrosoftThe Teams, AdobeCreative Cloud, and dozens of other popular workplace apps.
Monday.com’s business model is naturally insulated from the pandemic because stay-at-home trends have actually generated tailwinds for cloud-based companies that have streamlined and automated their digital workflows. That’s why its revenue rose 106% to $161 million in 2020, rose 91% to $308 million in 2021, and grew 79% year over year to $232 million in the first half of 2022. It expects 62%- Revenue growth is 63% this year , even as it faces tough currency headwinds and enterprise customers holding back their spending to cope with macro headwinds.
Monday.com’s total number of paid customers grew 34% to 152,048 in 2021. Of that total, the number of its larger customers generating more than $50,000 in annual recurring revenue (ARR) increased by 200 % to 793. The higher value cohort expanded to 1,160 customers at the end of the second quarter of 2022, representing 147% growth from the previous year.
Monday.com’s ecosystem is also sticky. Its net dollar retention rate exceeded 120% in 2021 and remained above 125% throughout the first half of 2022. Its net dollar retention rate for customers with more than 10 users also remained at over 135% in both periods.
But will it be profitable?
Monday.com’s top line growth is impressive, but it is highly unprofitable by both GAAP (generally accepted accounting principles) and non-GAAP measures. On a GAAP basis, its operating loss widened from $93 million in 2019 to $151 million in 2020, but narrowed slightly to $126 million in 2021.
On a non-GAAP basis, its operating loss widened from $71 million in 2019 to $86 million in 2020, then narrowed to $53 million in 2021. But this year it expects its non-GAAP operating loss to widen to $108- $112 million as it ramps up its R&D investments in expanding its Work OS platform.
Analysts expect Monday.com’s non-GAAP operating margins to remain negative through at least 2024. They expect its GAAP net loss to widen from $137 million in 2021 to $222 million this year.
If Monday.com’s gross margins continue to expand, we can assume that it can gradually rein in its operating costs to narrow its losses. But after rising from 86% in 2020 to 87.3% in 2021, its gross margin actually fell 40 basis points year-on-year to 86.5% in the first half of 2022, suggesting that its pricing power against peers platform like Asana (WHERE 1.51%) and Service Today (NOW -4.80%) remains relatively limited.
Liquidity and valuations
Monday.com’s slowing growth and steep losses make it a risky stock to hold as interest rates rise. However, it still sits at $836 million in cash and equivalents at the end of the second quarter of 2022, representing only a 6% decrease from the end of 2021. Its low debt-to-equity ratio of 0.5 also gives it room to take on more debt if its cash flow dries up.
At its peak in November, Monday.com was worth $19.6 billion, or a whopping 64 times the sales it will generate in 2021. Today it is worth $5.9 billion, or 12 times the sales it expects to generate in 2022.
The price-to-sales ratio may seem reasonable for a company that is likely to grow its revenue by more than 60% this year, but analysts expect it to continue its decline to just 34% growth next year. that year. If Monday.com’s long-term annual revenue growth stabilizes at around 30%, then its stock still isn’t that cheap — especially when comparable cloud software companies currently trade in the singles -digit price-to-sales ratio.
Monday.com will likely continue to grow, but it doesn’t scream bargain just yet. Investors should stick with more profitable cloud stocks that trade at lower valuations until interest rates stabilize again.
Leo Sun has positions in Adobe Inc. and Salesforce, Inc. The Motley Fool has positions in and recommends Adobe Inc., Asana, Inc., Microsoft, Salesforce, Inc., ServiceNow, Inc., Zoom Video Communications, and monday.com Ltd. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe Inc. and short January 2024 $430 calls on Adobe Inc. The Motley Fool has a disclosure policy.