The stock posts some of the best financial numbers on Wall Street, but trades at a much lower valuation than other high-performing stocks.
Growth stocks can be a wild ride. Long-term upside usually comes with stomach-churning volatility. monday.com (MNDY 1.27%) is currently experiencing ups and downs. As of this writing, shares are down about 28% from their highs.
The company’s software-as-a-service business model is disrupting the way employees collaborate in the workplace, and additional catalysts such as product expansion and artificial intelligence (AI) could produce growth at long term 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 is poised for long-term growth
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.
Elite execution, evidenced by his excellent rule score of 40
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.
Anything above 40 is generally considered a high score:
MNDY operating income (year-over-year quarterly growth) data by Y Charts
As you can see above, Monday.com grew its revenue 32.8% year over year in the third quarter while converting 32.6% of its revenue into cash flow. This represents a rule score of 40 slightly above 65, easily surpassing the standard benchmark. In other words, Monday.com’s growth and pricing power are reflected in its financials.
The stock price is evaluated just after this drop
By valuing Monday.com by its enterprise value in relation to its turnover, the title is well below its value at the exit of the market. Any stock market bubble in 2020 to 2021:
MNDY EV to income (future) data by Y Charts
Its valuation stands out (in a good way) compared to some of the other top tech stocks on Wall Street, like CrowdStrike Titles And Palantir Technologies. CrowdStrike’s enterprise value-to-revenue ratio is almost double that of Monday.com, but it scored a lower rule of 40 in the third quarter (51). Palantir’s Rule of 40 in Q3 was 87, but its valuation is also off the charts with an enterprise value-to-revenue ratio of 64.
I’d say Monday.com is performing better financially than most stocks today, but its valuation is very reasonable compared to other top tech stocks. If the company can continue its current momentum, Monday.com has a good chance of achieving market-beating long-term investment results. If that happens, the stock probably won’t stay this cheap forever.
Justin Pope holds positions on Monday.com. The Motley Fool features and recommends Adobe, CrowdStrike, Monday.com, Palantir Technologies and Salesforce. The Motley Fool has a disclosure policy.
