monday.com: Product Innovation Driving Profitable Growth (NASDAQ:MNDY)

Introduction and funding thesis

monday.com (NASDAQ:MNDY) launched its 2023 Q1 monetary outcomes on the 15^th of Might, which confirmed continued energy on the corporate’s prime and backside traces. Regardless of a difficult macroeconomic atmosphere and a strongly aggressive market, monday.com managed to set a number of new data in numerous firm particular metrics within the quarter like enterprise buyer web provides or FCF technology.

This has been coupled by continued innovation as the corporate began the discharge of mondayDB, a brand new information infrastructure for its Work OS platform. Moreover, monday.com opened its new gross sales CRM product for particular present prospects, which has been additionally an amazing success through the quarter. And naturally, an replace on the corporate’s AI technique has accompanied the Q1 shareholder letter and earnings name as nicely, which is these days a should if you’re a SaaS firm.

Taking all issues collectively, monday.com appears to strengthen its disruptive place within the challenge and work administration [PWM] area remaining my prime decide within the sector in the intervening time. If you’re all for an in depth dialogue on the corporate’s place within the PWM area earlier than diving into Q1 earnings see my article titled: “monday.com: Making A Distinction”.

Enterprise prospects and gross sales CRM product driving topline progress

monday.com reported revenues of $162 million for its first quarter in 2023 a powerful 50% progress YoY. This has surpassed the common analyst estimate by 4.5%, which was according to earlier quarters:

For Q2 monday.com projected revenues within the $168-170 million vary, which might imply 43% YoY progress on the midpoint, if we issue within the ordinary ~5% beat:

Though this is able to imply additional deceleration in topline progress, however a lot smaller than beforehand feared amid a basic macroeconomic slowdown. Within the prime of that, monday.com elevated its FY2023 income steerage by $13.5 million to $704 million on the midpoint, twice the dimensions of the Q1 income beat of $7 million. This clearly indicators additional optimism from administration and is an efficient signal that issues in Q2 are nonetheless monitoring nicely.

The principle driver behind this robust income progress has been the enterprise phase, which monday.com defines as prospects with ARR above $50.000. The variety of these accounts grew to 1,683 for the top of Q1 a file improve of 209 through the quarter:

I consider that within the gentle of current tech price range cuts by bigger enterprise prospects within the SaaS area that is an distinctive efficiency. Primarily based on the Q1 earnings name one cause behind this has been the bigger preliminary deal sizes the corporate encountered through the quarter. Moreover, monday.com launched its new (launched in August, 2022) gross sales CRM product in Q1 to a number of present prospects as nicely, which gained traction fairly rapidly. The corporate ended the Q1 quarter with 5,441 gross sales CRM prospects, greater than double the quantity only one quarter earlier than:

On the highest of that, the corporate additionally started to launch (accessible by ~30% of accounts) its freshly developed database structure, mondayDB, which considerably reduces the time for loading bigger and extra complicated boards. The next chart has been shared by administration within the Q1 shareholder letter about mondayDB’s capability to enhance effectivity:

The chart reveals that because the variety of gadgets in boards will increase the brand new database structure manages to maintain loading time near fixed, whereas it considerably will increase utilizing the earlier structure. I feel this resolution favors principally enterprise prospects, who are likely to create extra complicated boards with monday.com Work OS, so it’s one other robust gross sales argument for this phase. I consider that primarily based on this, the file bounce in enterprise prospects isn’t just a coincidence and it has additional room to go. The corporate’s effort to win the enterprise phase has been already seen in current quarters because the ARR contribution of this cohort elevated from 22% in 2022 Q1 to twenty-eight% in 2023 Q1.

Based on administration, monday.com will focus this yr on its present product line, which has been additional simplified not too long ago. It contains monday work administration, the core challenge administration resolution; monday gross sales CRM and monday dev, the corporate’s resolution for product improvement administration, which is simply out of beta. In the meantime administration sees nonetheless favorable traits within the efficiency advertising area (e.g.: on-line advertisements), in order that they determined to double down on this spending class, which may present robust help for the expansion of those product traces all through 2023.

Additional progress levers to tug

Moreover present progress drivers talked about above there are different vital tasks happening on the firm that might help topline progress within the upcoming years. The Apps Market is one in all them, the place exterior builders can construct on monday.com’s present platform to fulfill completely different business and firm particular PWM wants. It skilled a pleasant uptick in each complete and monetized Apps in current quarters, which will be seen as follows:

In the newest quarter, the variety of monetized Apps grew by ~50% signaling robust momentum. I suppose, the useful results of the brand new partnership with Appfire (introduced 2022 This autumn) are already seen. On the highest of that, administration shared on the Q1 earnings name that they partnered with one other collaboration app supplier, Adaptavist Group for an app accelerator challenge.

These efforts present that monday.com takes its mission very severely, which is to be construct a really open PWM platform that may be tailor-made by exterior builders to completely different business and firm particular wants. Primarily based on earlier earnings calls administration doesn’t anticipate important contribution to revenues from the Market this yr but it surely needs to be an vital progress driver within the medium/long run.

One other vital facet of future progress is after all AI, which has been the primary matter to be mentioned in administration’s Q1 shareholder letter. Relating to consumer effectivity the corporate launched the primary model of its AI assistant, which helps automated process technology, writing of emails and doc summaries with extra features to return. Moreover customer-oriented tasks monday.com is using AI additionally in-house to enhance inside effectivity and thereby improve margins.

Lastly, the corporate is opening its platform in June for 3^rd get together builders to construct AI apps, which shall be accessible on the corporate’s AI Assistant infrastructure. These actions show for my part that the corporate has stored its modern nature, which I regard as a extremely worthwhile trait on this aggressive market area.

Vital enchancment in margin profile

monday.com has managed to succeed in optimistic non-GAAP working revenue within the earlier, 2022 This autumn quarter for the primary time in firm historical past. This time in 2023 Q1 the metric got here in flat as results of each seasonally and strategically rising S&M bills along with additional rising R&D bills:

For FY2023 administration guided for ~1% optimistic non-GAAP working margin, which might be a major enchancment after the damaging 9% of FY2022, though it appears a bit of conservative within the gentle of current outcomes. In my view this might pave the way in which for additional beat and lift within the upcoming quarters.

Trying on the firm’s money technology capability we noticed one other file within the Q1 quarter with $38.7 million leading to a FCF margin of 24%:

With this, the corporate elevated its money stability to $936 million with no long-term debt on its stability sheet. Though it’s a very good setup for potential acquisitions, administration informed buyers on the Q1 earnings name that they shouldn’t anticipate bigger acquisitions on the brief run as the corporate focuses its efforts on natural progress in the intervening time.

It’s vital so as to add at this level that FCF margins may fluctuate from quarter to quarter to an amazing extent (e.g.: modifications in timing of money outlays and assortment, timing of train of share choices and associated tax results), so buyers shouldn’t contemplate 20%+ FCF margins as a brand new norm. For instance, the proceeds of possibility workout routines and worker share repurchases plus the associated tax results resulted in more money influx of $11 million through the quarter, ~28% of complete FCF generated. This received’t be the case each quarter. Administration left buyers with a conservative remark in that regard:

“We now anticipate to report optimistic free money movement on a constant quarterly foundation transferring ahead and to attain our third consecutive yr of being free money movement optimistic in fiscal 2023.” Eliran Glazer, CFO on Q1 earnings name.

I consider the primary level concerning the corporate’s backside line is that the pattern in margins is optimistic and the lengthy interval of fixed money burn has come to an finish. Nevertheless, buyers shouldn’t anticipate a CrowdStrike (CRWD) or Snowflake (SNOW) like FCF margin profile for some time as monday.com continues to speculate aggressively in future progress in a really aggressive market. Though, I consider that the additional bettering gross margin profile (89.5% in most up-to-date quarter, see beneath) means that the time will come when monday.com may presumably be part of the above-mentioned elite:

Valuation a number of has additional room to broaden

Though monday.com’s share worth elevated considerably through the previous two weeks it solely reached ranges final seen in March this yr. With this, shares at present commerce at a ahead Value/Gross sales a number of of 9.6. For some buyers this might appear a bit lofty for the primary sight, but when we contemplate that revenues may presumably improve at a CAGR of ~30% within the upcoming 3 years the a number of may lower to ~4.4 over this time horizon.

Making use of a 20% web margin profile to this, which I consider is an actual risk for the corporate over the long term we might get a hypothetical ahead P/E ratio of twenty-two for 2026. In my view the robust progress prospects of the corporate stretch far past this time horizon, which might justify a a lot larger a number of, presumably even twice as excessive. This reveals that monday.com’s valuation a number of has sufficient room to broaden from present ranges within the upcoming years.

Updating my relative valuation matrix (primarily based on ahead EV/Gross sales and revenues) throughout the public PWM area reveals that shares are nonetheless valued conservatively when in comparison with the closest rivals:

In comparison with monday.com the shares of ServiceNow (NOW) and Atlassian (TEAM) are nonetheless considerably valued larger by the market regardless of weaker progress prospects. As well as, the shares of Asana are nearer to the theoretical ahead EV/Gross sales valuation a number of that its progress price suggests (blue dotted line), though it’s typical for the best growers to be shut or exceed this line. Primarily based on this I consider, that monday.com’s shares are nonetheless valued conservatively in comparison with another opponents within the PWM area and shares ought to commerce a minimum of on the common progress adjusted ahead EV/Gross sales valuation a number of. This is able to suggest a ratio of 9.7 (blue arrowhead) in distinction to the present a number of of 8.45, which implies that shares ought to outperform the common of opponents by ~15%, presumably already on the shorter run.

Danger components

Lastly, there are few threat components surrounding the corporate, that are value to debate shortly for my part.

First, the PWM area is characterised by very robust competitors and comparatively low obstacles to entry. Moreover, the options firms supply on this area are assessed typically fairly subjectively for my part. We wouldn’t discover a company the place a handful of individuals wouldn’t complain in regards to the precise PWM resolution in use, because it typically actually will depend on private preferences. Because of these components, I feel it’s a quickly and continually altering market, the place firms have to be very versatile to outlive. Till now, monday.com has proved that they’ll sustain with this tempo and even drive new traits with their modern nature. Nevertheless, it’s value to watch intently whether or not these dynamics change sooner or later. Till they don’t, I recommend having fun with the trip.

Second, we’re nonetheless not out of the woods concerning the final macroeconomic slowdown and the ensuing cuts in IT budgets. There was some excellent news from completely different SaaS firms on this entrance, which led to a slightly important improve in share costs, however buyers needs to be cautious, whether or not this pattern continues. If this enthusiasm proves to be untimely it may result in one other sharp drop in share costs. I feel within the Q2 earnings season it is going to in all probability end up whether or not we are able to anticipate a protracted turnaround or the softer spending atmosphere continues.

Conclusion

monday.com is a really modern firm in the course of a product innovation cycle, which started to bear fruit not too long ago and has a lot additional room to run. That is coupled with a robust stability sheet, continually bettering profitability, and an inexpensive valuation, which make shares a very good long-term funding for my part. As a result of quickly altering nature of the PWM area it’s value to watch fundamentals intently by checking whether or not previous traits nonetheless prevail from quarter to quarter.