monday.com Q2 Earnings: Still Oozing High Margin Growth

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Investment Thesis

monday.com (NASDAQ:MNDY) is rapidly moving beyond just a collaborative workflow platform. Yet, with “growth stocks” falling out of favor with investors, the stock has seen its multiple compress significantly, and its shares are down nearly 60% from previous highs.

Nevertheless, monday.com remains focused on growing the reach of its offering and the company continues to consistently upwards revise its full-year estimate.

I believe that paying 10x next year’s revenues for monday.com is a very fair multiple for new investors coming to the stock.

MNDY’s Revenue Growth Rates Remain Alluring

monday.com revenue growth rates

MNDY revenue growth rates

Roughly two years since the start of the pandemic and the visual work operating system platform, monday.com is still seeing massive demand for its solutions, with its revenue growth rates increasing by 75% y/y.

In fact, this lightly followed workflow company continues to beat analysts’ revenue estimates ever since its IPO.

Meanwhile, its guidance for Q3 2022 points to attractive growth rates, albeit pointing to a fair amount of sequential decelerations, as its revenue growth rates go from printing 75% y/y revenue growth to being guided towards 58% y/y of revenue growth.

What’s more, looking further ahead, Q4 2022 is expected to grow in the mid-40s% CAGR range.

All that being said, keep in mind that when monday.com guided for its full-year 2022 results when it reported its Q4 2022 results, it guided for 54% y/y at the high end of its guidance.

Then, this revenue growth rate was upwards revised when monday.com reported its Q1 2022 results so that 2022 was expected to grow by 60% y/y in 2022.

Then, yesterday, when monday.com reported its Q2 2022 results, it once again upwards revised its full-year outlook to 63% y/y growth.

Consequently, this implies that since the start of 2022, monday.com has found enough revenue growth to upwards revise its full-year target by 900 basis points.

Accordingly, I am inclined to believe that when monday.com finally reports its full-year 2022 results, it will probably see more than 65% y/y growth this year.

Moreover, recall that this is after posting a 91% CAGR for 2021 as a whole. Simply put, monday.com is a very rapidly growing company.

monday.com’s Near-Term Prospects

monday.com started off as a collaborative platform. However, now monday.com has moved beyond this core focus to other product suites, most notably sales CRM, marketer, developers, and projects.

This has seen very strong customer adoption at the enterprise level, defined as customers spending more than $50K.

monday.com number of enterprise customers with more than $50K ARR

MNDY Q2 2022

As you can see above, enterprises spending more than $50K in ARR were up 147% y/y. There are no two ways about it, this is clearly impressive, as monday.com now has more than 1,000 customers spending $50K on its platform.

This shows that monday.com is resonating very strongly with large well-funded customers that can pick out only the best collaborative platforms.

Profitability Profile Moves in the Wrong Direction

monday.com sees its cash flows from operations report a negative $14 million compared with breakeven in the same period a year ago.

On the surface level, this is not great, since you’d want to see monday.com turn its excess revenues towards positive cash flows, given that last year was already at breakeven.

That being said, realistically, at this stage in its business cycle, monday.com should not be focused on maximizing its cash flow profile.

If a business can continue to report more than 40% y/y in revenue growth rates, that business should continue to plow back as many dollars as it can find to seek growth opportunities.

Hence, I’m content to give this consideration a pass.

What’s more, monday.com’s gross margin profile remains around 89%, which clearly points to a very quality business, which should in time see this high gross margin profile translated into a higher valuation multiple.

MNDY Stock Valuation – 14x 2022 Sales

Presently, monday.com is being priced at 14x this year’s sales. If we were to presume that the few analysts following monday.com are vaguely correct and that monday.com’s 2023 revenues grow by 35% y/y, this would see its revenues reach approximately $680 million.

This would put monday.com priced at 10x next year’s revenues. When we look back to this time last year and see that the stock was getting valued at 28x forward sales, this makes today’s 10x forward sales appear a much more reasonable valuation.

The Bottom Line

Back in 2021, there was very little dispersion in the market, as stocks moved very closely in tandem.

However, I believe that 2022 will be the year of the stock picker!

In 2022, it will matter who has put in the work and who has not; which investors put in the work, to figure out what businesses are worthwhile investing in and what businesses make no sense at their present valuations.

In the case of monday.com, with its stock down nearly 60% from its previous highs, despite its resounding progress to not only seek new markets but also materially upwards revise its full-year revenues throughout the year, I believe that investors today will do well to consider paying 10x next year’s revenues for monday.com.

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