Monday.com Has More Than Doubled Since IPO. Has it Gone Too Far Too Quickly ?

Less than 3 months after its' IPO Monday.com (ticker MNDY) stock price has more than doubled. It has become the third largest Israeli company in market cap behind only NICE systems and Checkpoint and ahead of veterans such as TEVA and AMDOCS

Who is Monday.com

Monday.com is a Tel Aviv based startup started by Eliran Glazer and Ron Mann. Mann was previously employed at Wix working for high school friend and Wixx founder Avishai Abrahami. His objective was to learn how to run a successful startup. Obviously he learned well. Monday.com has gone from being considered Wix’s little brother to dwarfing it in market cap. Abrahami’s stake in Monday.com is more valuable that his holdings in Wixx.

The company was founded in 2012 and has 800 employees. In addition to its headquarters in Tel Aviv in has offices in New York, San Francisco, Miami, Chicago, London, Kiev and Sydney. The platform is currently used by over 125,000 customers across over 200 industries in more than 190 countries.

What Does Monday.com do?

Monday.com provides software for management of projects Monday.com provides software for management of projects across teams. The software creates dashboards for collaborative work. It calls its' product no code or low code because in addition to the dashboard where team members check up on each other projects it can also allow users to add to the program: for instance:" if product design is completed email marketing team”. The software integrates with many other apps such as outlook, mailchimp and slack. They have recently added a feature that allows collaborative work on docs that can be shared and worked on real time by the project team. It's not hard to see that the evolving hybrid model of remote/in office work will be an ideal environment for adoption of Monday.com software.

This video shows how Monday works.

Monday.com is SAAS (software as a service) meaning it sells the service on a subscription basis. SAAS products have potential for high profitability as they scale up since the marginal cost of providing the service to new subscribers is minimal compared to any "manufacturing costs" (r+d and programming). The SAAS structure has potential for high margins because of its subscription structure: there is no need to produce a new item to deliver in order to gain more revenue from an existing client. And obviously once an enterprise commits to using Monday it is “sticky” it is unlikely to switch to a competitor. As each quarter begins Monday has a steady stream of revenue in place. Monday has a customer retention rate of 111% clients not only stay with Monday they increase their usage. Monday’s customers paying subscriptions of $50,000 or more has risen from 23 in 2019 to 7000 currently.

The total addressable market for its product are seen to be $56 billion rising to $88 billion.

IPO

Monday.com went public on the Nasdaq on June 10 . Notably, Zoom and Salesforce participated for $75 million each and all the underwriters exercised their options to buy stock at the IPO price...a sign of confidence in the company.

The IPO price was $155 and the stock rose 15.4% on the ipo date to $178.87 giving it a market cap of $7.85 billion. Monday.com became the largest ever IPO for a company headquartered in Israel. In its' most recent VC financing round in 2019 the company's valuation was at $.5 bln. A large portion of the cash raised in the IPO will be used for sales and marketing.

Monday.com closed the first day of trading at for a valuation of $7 bln . Three years ago it was valued at ½ $billion in the private market. The founders were multibillionaires at the end of the first day of trading. The rest of the employees no doubt saw major increases in their net worth. The founders stated they have learned from other Israeli founders not to pay too much attention to the stock price.

The stock traded relatively sideways until the release of second quarter results on August 16.

Second quarter results: Monday.com released its' first reporting period as a public corporation on August 17. The conference call transcipt can be found here. Results exceeded market expectations across all major metrics and the company raised guidance for the rest of 2021.

Revenue was up 94% year over year to $70.6 million, an acceleration from the 85% pace set during the first quarter. Consensus estimates were for $62.1 million.

Management guidance for full year 2021 is for revenue of $280 -$282 million which would represent 74% annual growth.

The company reported a loss per share (EPS) of $.26 per share for the quarter, topping the consensus estimate of $1.00 per share loss by $.74.

At this early stage MNDY is not aiming at making a profit and in fact that it's loss was far smaller than expected. Monday.com will be using the proceeds of the IPO to expand its market presence. It now has $865 million in cash on hand. It's "burn rate" reflected in change in free cash flow was relatively small and has actually declined in the last twelve months. That means Monday.com has plenty of "firepower" to spend on sales, marketing and product development

Crucial to its growth as SAAS is the growth in large clients which is impressive:

Among large clients are BBC, Peloton,Hulu,Adobe,Unilever,Abbot Labs and the NHL. This article illustrates how some customers are using monday.com. Monday.com highlights some success stories here.

Analysts at major firms raised their price targets after the earnings release and MNDYs current stock price of $351 stands almost closeto the level of many analyst with the consensus price target. Average price target for MNDA is $328 but that includes companies that have not issued new price targets since the earnings release.

Analysts at major firms that issued new reports after the earnings release allraised their price targets significantly,. Here are previous and current price targets:

Valuation and Future Prospects:

Obviously, the stock movement has pushed Monday.com s valuation up significantly. It is now valued at $16 bln. MNDY management asserts that in 70% of the cases marketing to large potential users there really isn't direct competition since MNDYs platform offers more flexibility.

The market has put a high multiple on SAAS companies because of the attractive business model since it is subscription based the companies begin each quarter with locked in revenue. And major costs are in marketing since there are no products "produced" in manufacturing. Expenses are sales,marketing, customer support and R+D.

This there is high leverage in profitability as the client base grows. That is why the revenue growth, growth in large customers and high customer retention rate of MNDY is impressive. Management sees large potential for growth and investors seem to agree. Here is a comparison of MNDY vs the two other large players in the field. The main challenge for Monday.com is to continue to build clients and revenues to keep up with expectations.

Although MNDY management asserts that in most cases the dont have competition when marketing potential new customers, it makes sense to compare MNDY metrics to others in the space most notably Smartsheet and Asana.

This leads to a very high valuation for MNDY. Price to sales has jumped since the quarterly report showing a 94% increase in revenue meaning continued growth

Obviously MNDY stock is valued based on sentiment that it can meet or exceed its guidance on revenue growth. Given the large cash on hand they definitely have a large amount of ammunition to fund sales, marketing and r+d. If management is correct that MNDYs offering is unique they should be very successful in building their revenue stream.

Revenue yoy is at 94% based on second quarter rerports. Management is guiding for 74% yoy growth for all of 2021 The market will likely be patient in waiting for income. But any disappointments in revenue growth will likely lead to a significant decline in the market price ...and more quarterly revenue reports like the one just released will be a tailwind Until then it is unlikely there will be major news to push up the stock. The end of the lock up period fro insiders including the founders and employees ends 6 months after the IPO so there may be some selling pressure in December.

The stock has had some volatile days but the movement has,so far, with steadily to the upside. The relatively low volume indicates that the fickle retail traders are not involved. The fact that a motley fool analyst calls it an "under the radar" stock is a good thing.

Monday.com is a strong performer in an attractive segment of tech: software as a services. There is a large addressable market and Monday is adding revenue at a blistering rate. The company is aiming at growing revenues, not profits at this point meaning a slowing of revenue growth will be negative for the stock....and vice versa.