Shares of workflow and customer relationship management software outfit Monday.com (NASDAQ: MNDY) have soared from their November 2022 lows. Although the bear market has taken a heavy toll on the company (the stock is down 69% from its all-time high), investors have been cheering on resilient double-digit revenue growth and progress on profit margin expansion.
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Nevertheless, Monday.com stock fell again following its final quarterly update for 2022. With tech stocks showing signs of heating up again, is it too late to buy Monday.com ahead of a new bull market?
Monday.com’s epic conclusion to 2022
Monday.com reported revenue of $150 million in Q4 2022, blowing away the estimate it provided a few months ago for as much as $142 million. The quarterly sales represented stellar year-over-year growth of 57% — or 60% growth when excluding the negative impact of exchange rates due to a strong U.S. dollar.
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Full-year 2022 revenue was up 68% (71% excluding currency exchange) to $519 million. By all accounts, this was a great run for Monday.com as it navigated the bear market and exceeded the rapid slowdown in customer spending that plagued many of its cloud software peers.
What was really promising was that Monday.com reported huge progress on profitability. It’s net loss in Q4 was just $1.5 million, compared to a net loss of $32.6 million a year ago. On an adjusted (non-GAAP) basis, the company reported net income of $22.2 million (versus a net loss of $11.7 million last year). The company also reported positive free cash flow for the year (not much, but $8.1 million), with the discrepancy between GAAP and adjusted profit metrics primarily being employee stock-based compensation of $105 million in 2022.
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Nevertheless, on a per-share basis (which accounts for dilution from the stock-based comp), Monday.com is still showing signs it could be a promising profitable investment over the long term. It has grown revenue and free cash flow on a per-share basis for shareholders since its 2021 IPO.
Why investors have a ‘case of the Mondays’
Despite the great finish to 2022, the market sold off Monday.com. Why? It’s all about its guidance.
Management expects to kick off 2023 with Q1 revenue growth of at least 42%, and full-year 2023 sales growth of at least 33%. It’s an enviable pace, but nonetheless a slowdown. Additionally, Monday.com forecasts an adjusted operating loss of up to $36 million for 2023 (although the top team said on the earnings call it expects to be free-cash-flow positive throughout the year).
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Monday.com has said some of its competitors (like Atlassian and Asana) have scaled back on marketing to try and get themselves more financially fit. Given that Monday.com has already reached a profitable scale, management is leaning in on its sales efforts to try and take some market share. Some engineer hiring will also take place in the next year to help with building new product launches. Thus the outlook for adjusted profit to turn red again.
Nevertheless, the outlook for positive free cash flow is still a good sign, and management reiterated on the earnings call that it’s still on track to reach GAAP profitability “before 2025.” And along the way the business has a fortress balance sheet with $886 million in cash and short-term investments and zero debt.
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Monday.com stock currently trades for about nine times expected 2023 sales. It isn’t cheap, but the company is outperforming many of its peers in growth, and by some measures has already reached profitability. The bear market appears to have segued into a bull market for this company, but I don’t think it’s too late to buy if you think it can keep growing at a rapid pace for a couple more years. I do expect shares will be highly volatile this year, but I’m ready to make a purchase.
If you buy too, I’d caution to do so prudently, perhaps using a dollar-cost averaging plan to build up to a larger position in this cloud software business over time.
