Growth stocks can be a wild ride. Long-term upside usually comes with stomach-churning volatility. monday.com (NASDAQ:MNDY) is currently experiencing ups and downs. As of this writing, shares are down about 28% from their highs.
The company software as a service business model disrupts the way employees collaborate in the workplace, and additional catalysts such as product expansion and artificial intelligence (AI) could produce long-term growth capable of generating outsized returns. The company is executing at a high level, making this recent decline a buying opportunity.
Here’s what you need to know.
Monday.com’s core business is its cloud-based collaboration software. It is a highly customizable low-code platform where users can organize tasks, share information, and integrate automation and applications to improve workplace efficiency. Today, more than 225,000 customers use the product in 200 countries.
The company’s growth model is brilliant. It’s free for the first two people in an organization, making it easy for any business to try it. If they like it, the software spreads throughout the company, moving up the price ladder as more people use it. This sales process produced a solid net revenue retention rate of 111%, highlighting how customers spend more over time.
Monday.com’s long-term upside depends on how well it leverages its core project and task management software to penetrate adjacent markets. Since 2022, the company has launched several new products, including a customer relationship manager (CRM) for sales, Dev for product and development teams, and a service for IT and support. Monday.com has integrated various AI tools and features to improve its products, leading to better user experiences and more loyal customers.
Today, Monday.com generates $906 million in annual revenue and grew more than 32% year-over-year in the third quarter. It remains to be seen how high Monday.com’s ceiling is, but its product roadmap signals its intention to become a do-it-all enterprise software company. Some of the biggest tech companies in the world, like Adobe And Sales forcedeals with enterprise software.
If Monday.com consistently converts businesses into paying users and moves them up the price ladder, it will have a long runway for growth.
Competition is fierce in the business software space, with so many players that it can be difficult to find the best of the bunch. Investors can use the rule of 40 to identify companies that are performing well. The rule of 40 is a simple metric that measures a company’s ability to grow without sacrificing profitability. Add a company’s revenue growth rate to its free cash flow margin to calculate its Rule of 40 score.
