monday.com (MNDY -5.17%) 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 day one, and then soared to an all-time high of $444.70 last November.
Monday.com initially generated a lot of buzz because it grew like grass and was backed by Sales force (CRM -2.11%) Y Zoom Video Communications (ZM -1.91%). But as interest rates have risen, the stock has plunged below its IPO price and is now trading at $130. Does that sharp pullback represent a good buying opportunity for long-term investors?
What does Monday.com do?
Monday.com’s cloud-based platform enables businesses to develop their own custom applications and work management software. It also offers pre-built “recipes” to automate various tasks, and can be integrated directly into Microsofts teams, AdobeCreative Cloud and dozens of other popular apps for the workplace.
Monday.com’s business model was naturally insulated from the pandemic, as stay-at-home trends actually created a tailwind for cloud-based businesses that streamlined and automated their digital workflows. That’s why its revenue soared 106% to $161 million in 2020, 91% to $308 million in 2021, and 79% year-over-year to $232 million in the first half of 2022. Expect 62% revenue growth to 63% this year, even as it faces stiff currency headwinds and business customers rein in their spending to weather macroeconomic headwinds.
Monday.com’s total number of paid customers grew 34% to 152,048 in 2021. Within that total, its number of largest customers generating more than $50,000 in annual recurring revenue (ARR) increased 200% to 793 That higher value cohort expanded to 1,160 customers at the close of the second quarter of 2022, which represented a growth of 147% over the previous year.
The Monday.com ecosystem is also complicated. Their Net Dollar Retention Rate exceeded 120% in 2021 and remained above 125% for the first half of 2022. Their Net Dollar Retention Rate for customers with 10+ users has also remained above 135% % during both periods.
But will it ever turn a profit?
Monday.com’s top-line growth is impressive, but it remains profoundly unprofitable by GAAP and non-GAAP measures. Under GAAP, 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 that increases its investments in R&D in the expansion of 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 continued to expand, we might assume that it could gradually rein in its operating expenses to reduce its losses. But after rising from 86% in 2020 to 87.3% in 2021, its gross margin actually fell 40 basis points year-over-year to 86.5% in the first half of 2022, suggesting that its fixing power prices compared to similar platforms such as asana (ASAN -5.99%) Y service now (NOW -2.24%) is still quite limited.
Liquidity and Valuations
Monday.com’s slowing growth and heavy losses make it a risky stock to hold as interest rates rise. However, it still had $836 million in cash and equivalents at the end of the second quarter of 2022, which is only a 6% decline from the end of 2021. Its low debt-to-equity ratio of 0.5 also gives it room. take on more debt if your cash flow dries up.
At its peak last November, Monday.com was valued at $19.6 billion, or 64 times the sales it would generate in 2021. Today it is worth $5.9 billion, or 12 times the sales it expects to generate in 2022.
That price-to-sales ratio may seem reasonable for a company that is likely to grow revenue by more than 60% this year, but analysts expect its slowdown to continue with only 34% growth next year. If Monday.com’s long-term annual revenue growth levels off at around 30%, then its stock still isn’t that cheap, especially when comparable cloud software companies currently trade at a price-to-sales ratio of a single digit.
Monday.com will probably continue to grow, but it’s still not a bargain. Investors should stick with the more profitable cloud stocks trading at lower valuations until interest rates stabilize again.
leo sun holds positions at Adobe Inc. and Salesforce, Inc. The Motley Fool holds positions 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: $420 long calls in January 2024 at Adobe Inc. and $430 short calls in January 2024 at Adobe Inc. The Motley Fool has a disclosure policy.