MNDY - monday.com: A Few Indicators Point To Higher Stock Prices

2023-07-12 09:31:32 ET

Summary

• The project management software industry has come a long way in the last decade, with new players disrupting the way people work and collaborate.
• monday.com is a cloud-based work operating system that enables teams and organizations to manage projects, workflows, and goals.
• monday’s main value proposition is its ability to offer customizable workspaces without requiring coding or technical skills.
• A closer look at software replacement habits highlights how monday.com's value proposition aligns with current market needs.
• A DCF model with conservative assumptions was used to estimate the intrinsic value of monday.com, and the findings are discussed in this article.

The project management software industry has come a long way in the last decade, with new players disrupting the way people work and collaborate. The growing popularity of remote working has proved to be a boon for this industry as well. monday.com Ltd. ( MNDY ), a leading player in this space, debuted on the NASDAQ in June 2021 at a time when investors were rushing to get behind growth companies. From the IPO price of $155, MNDY stock surged to over $400 within months of its market debut, but since November 2021, the going has been tough. Alongside the comeback of tech stocks this year, MNDY has gained 47%, and I thought the company deserves a closer look given the changing landscape of the project management industry.

The Business

monday.com is a cloud-based work operating system that enables teams and organizations to manage projects, workflows, and goals. The company was founded in 2012 by Roy Mann and Eran Zinman, who wanted to create a tool that would help people work better together. monday.com's business model is based on a subscription fee that varies depending on the number of users, the features, and the support level. With its flexible and adaptable architecture, monday.com's Work OS enables businesses from over 200 countries and territories, spanning 200+ industries, to streamline their workflows, breakdown silos, and enhance collaboration. By offering a comprehensive suite of work management tools and software applications, monday.com has become the go-to solution for thousands of use cases, attracting a wide range of customers, including 59% of Fortune 500 companies and over 186,000 satisfied customers. Some of its notable clients include The Coca-Cola Company ( KO ), Hulu, Adobe Inc ( ADBE ), and Universal Music Group.

Value Proposition: Empowering Productivity Through Customizable Workspaces And Streamlined Tools

monday’s main value proposition is its ability to offer customizable workspaces without requiring coding or technical skills. Users have the freedom to personalize their boards, columns, views, integrations, and automation according to their specific needs and preferences. This flexibility and adaptability are crucial in today's fast-paced business environment, where agility and speed are paramount.

By deploying a modular infrastructure and packaging its offerings into different products, monday.com has successfully expanded its presence across several industries and addressed a wide range of use cases seamlessly. This strategy eliminates the typical friction associated with adopting new software and establishes monday.com as a pioneer in this space. This innovative approach allows for the integration of diverse tools and applications, creating a unified workspace for users.

What sets the monday.com Work OS apart from traditional software is its provision of customizable, no-code building blocks. These blocks are designed to be user-friendly, empowering individuals to develop their own tools and workflows without requiring extensive coding knowledge. This non-rigid infrastructure ensures easy adoption and scalability over time, enabling users to tailor their experience to their specific requirements. monday.com's philosophy of providing a compounding effect with each building block allows for rapid advancements and continuous improvement within organizations.

Further, integration and automation are key strengths of monday.com. The platform seamlessly integrates with various digital tools used across different departments and applications within an organization. The platform aggregates data and streamlines workflows by serving as a connective layer, ultimately enhancing organizational agility and boosting productivity. Moreover, the platform's automation capabilities simplify the process of automating complex workflows, thereby accelerating digital transformation and increasing operational efficiency.

monday.com recently conducted a global survey in collaboration with independent research company RepData to gain insights into employees' perspectives on work processes, software usage, and their companies' technology tools, as well as their priorities for the year. The survey revealed a significant disconnect between organizations and employees when it comes to efficient processes, tools, and workflow. While employees worldwide recognize the need for simplicity in their work processes, they often face obstacles within their own companies. For instance, although 92% of employees consider productivity crucial for business success in 2023, only 26% believe they have the necessary tools to streamline their work processes effectively.

To address this gap and improve productivity, employees seek consolidation and streamlining of their technology tools. On average, workers use 10.5 technology tools per month, split equally between web-based and PC-based tools. The majority of knowledge workers (80%) acknowledge that collaboration and productivity tools enhance employee engagement, and approximately three in four workers believe that consolidating their company's toolset should be a high priority.

Interestingly, those who rate their company well in terms of using technology to simplify processes showed higher agreement with the need for consolidation. This suggests that they have experienced the benefits and are eager for further improvements. Workflow automation, in particular, emerged as a top priority for employees. Although there was a lack of clarity on how to achieve it, a large percentage of workers (84% to 87%) recognized that workflow automation would boost productivity, make workers happier, and improve morale. However, only 26% of employees fully agreed that their companies already had the necessary tools for automation.

The survey findings indicate the need for organizations to focus on streamlining their tools and processes to meet employees' goals and maximize productivity. This is the value proposition offered by monday.com as well, which allows the company to emerge as a problem solver.

Dynamic Growth Strategy

monday.com's go-to-market strategy is centered around rapid product innovation and expansion into new markets. Through innovation, monday.com aims to capture market share and provide valuable solutions to a wide range of industries and enterprise customers.

In line with this strategy, monday.com has embarked on incorporating Artificial Intelligence into its Work OS. The AI strategy focuses on three key components: increasing user efficiency, improving internal operations, and harnessing the power of proprietary data from over 200 business verticals. By leveraging AI technology, monday.com aims to enhance the efficiency, speed, and overall user experience of its platform.

To kickstart its AI initiatives, monday.com has launched the Monday AI Assistant. This intelligent assistant brings features such as automated task generation, email composition, and document summaries to users, significantly improving their productivity and experience. By introducing AI capabilities, monday.com empowers its users with intelligent tools that automate repetitive tasks and streamline their workflows.

Furthermore, in an effort to foster collaboration and innovation, monday.com is opening its platform to third-party developers. This initiative allows developers to build AI apps on the monday.com Work OS, promoting collaboration and driving rapid innovation. These AI apps will be available on the monday AI Assistant infrastructure, expanding the capabilities and possibilities for users.

Internally, monday.com is harnessing its vast dataset to enhance its own operations through AI. This includes automating parts of the sales process, improving customer experience, and adding an AI layer to its in-house business intelligence tool, BigBrain. By leveraging AI within its own operations, monday.com aims to optimize its internal processes and make data-driven decisions.

Additionally, monday.com plans to utilize its data to assist future customers in setting up and maintaining optimal workflows and automation. This data-driven approach can help customers navigate the platform effectively and connect the right people to the right processes, further enhancing business efficiency.

In terms of infrastructure improvements, monday.com is introducing mondayDB, a brand-new data infrastructure within the monday Work OS. This infrastructure enables bigger workflows, larger boards and dashboards, more robust developer capabilities, and improved overall performance. The first phase of mondayDB focused on boards has already demonstrated significant performance improvements, particularly on large and complex boards. The rollout of mondayDB 1.0 to all customers is expected to be completed by the end of Q2.

Exhibit 1: Product innovation timeline

As part of its efforts to expand its product offering, monday.com is building an app marketplace. Collaborating with enterprise app providers like Database Group, Adaptavist, and Appfire, monday.com aims to create a robust marketplace with a diverse range of apps. These partnerships will help accelerate the growth of the marketplace and provide customers with a wider selection of specialized apps to enhance their work processes.

The Industry Outlook And Competitive Landscape

The project management software market is experiencing significant growth, driven by the increasing adoption of software solutions to enhance productivity and business efficiency. According to Mordor Intelligence, this software market is valued at $5.91 billion today and is expected to grow at a CAGR of 10.67% through 2028 driven by the increasing number of organizations seeking innovative tools and technologies to streamline project management processes. As illustrated below, Gartner data reveals that this growth is not concentrated on just one region. Rather, the project management software market is seeing steady growth globally.

Exhibit 2: Project management software industry growth by region in 2022

monday.com operates in a competitive landscape with several notable competitors offering similar features and user experiences. One prominent competitor is Wrike, which Forbes Advisor identifies as one of the best free alternatives to monday.com. Wrike offers advanced features such as time tracking, Gantt charts, and automation, along with integration capabilities with various apps like Google Workspace and Microsoft Office 365.

Another close competitor is Asana, Inc. ( ASAN ), recognized by Gartner Peer Insights as the most similar tool to monday.com. Asana offers a team-centric approach to project management, offering multiple views and strong communication features like comments, mentions, and approvals. Further, Atlassian Corporation's ( TEAM ) Jira and Trello are prominent competitors to monday.com in the project management and team collaboration space. Jira is a widely recognized tool, particularly suited for agile teams and software development projects. It offers robust features for agile methodologies like Scrum and Kanban, along with powerful reporting and analytical capabilities. Jira integrates seamlessly with other Atlassian products, such as Confluence and Bitbucket, creating a comprehensive ecosystem for project management and software development. Trello, on the other hand, is known for its simplicity and visual approach to project management. Based on the Kanban system of cards and boards, Trello allows users to organize their projects and tasks in a visually appealing and intuitive way. It offers a range of templates, power-ups, and integrations to enhance its functionality and adapt to different workflows. Both Jira and Trello provide options for team collaboration, communication, and task management. While Jira focuses on agile methodologies and software development, Trello caters to a broader audience seeking a user-friendly and flexible project management solution.

In this evolving landscape, integration issues with existing systems emerge as a leading cause of buyer churn. Approximately 15% of respondents actively seek alternatives before renewing their current software due to integration challenges, availability of better alternatives, and buggy products. However, monday.com stands out as a solution to integration challenges, providing a platform that seamlessly integrates with various tools and applications, creating a unified workspace. By offering a comprehensive and integrated solution, monday.com addresses the top reason for software replacement, enhancing the overall user experience and overcoming integration obstacles.

Despite the competition, monday.com maintains a competitive edge with its focus on artificial intelligence and new product launches. The company has recently launched its platform on the Amazon Web Services Asia Pacific (Sydney) Region, enabling regional customers to securely store data in Australia and comply with local privacy regulations. The company also announced a partnership with Appfire, a renowned enterprise collaboration app provider, to expand its app marketplace. The partnership aims to offer monday.com customers a diverse range of apps tailored to their unique business workflows and projects. By leveraging Appfire's expertise, monday.com can enhance its marketplace and meet the evolving needs of its user community.

Additionally, monday.com has demonstrated resilience and continued growth despite the global economic crisis and a slowdown in the tech industry. On the other hand, both Atlassian and Asana are experiencing challenges to maintain growth. Atlassian, in the process of transitioning its customer base to the cloud, is facing a slowdown in the conversion of free users to paid subscriptions. The company's traditional software license business model is being phased out in favor of cloud subscriptions. As for Asana, although it has seen growth in its paying customer base, its growth rate in the most recent reported quarter was relatively modest at 26%.

In contrast, monday.com stands out with remarkable growth. With revenue increasing by 50% in the first quarter of 2023, the company continues to outperform expectations. The company has also made significant strides in reducing its operating loss, showcasing its focus on optimizing operations and driving efficiency. monday.com acquired over 1,600 customers in the last quarter who pay more than $50,000 per year for its products. This substantial increase from the previous year demonstrates the company's ability to attract and retain larger enterprises, even during challenging economic conditions.

Exhibit 3: Number of enterprise customers

Impressively, monday.com has achieved a remarkable customer retention rate of 115%. This accomplishment is particularly significant given the market conditions where organizations are actively seeking ways to reduce spending on software solutions. While the growth rate may be lower than in 2022 because of the challenging macroeconomic environment, monday.com's ability to outpace its rivals showcases its resilience and strong market position. Despite the challenging circumstances, monday.com remains a frontrunner in the industry and is well-positioned for continued growth.

Valuation

monday.com turned operating cash flow positive in 2021 and the momentum continued in 2022 as well. In the first quarter of 2023, monday.com reported operating cash flows of $42.7 million, almost eclipsing the total operating cash flow reported in 2021 and 2022 combined. For a company that is growing in double digits, this is a welcome sign. With free cash flow also turning positive, it makes sense to use a discounted cash flow model to calculate an intrinsic value estimate for the company. Before I share my projections, please note that a lot can still go wrong for monday.com, and to account for this risk, I have used conservative assumptions in my model.

Below are the revenue projections used in my model.

Source: Author's projections

The project management software market is expected to remain strong in the next decade, but I have estimated a deceleration in monday.com's revenue growth rates in the next five years to account for the intensifying competition in the industry. Using a long-term tax rate of 28%, a weighted average cost of capital of 12%, and an exit revenue multiple of 6x derived from the median trading multiples of a group of software companies, monday.com's intrinsic value estimate comes to $169, which implies the company is fairly valued in the market today.

monday.com has benefited from strong earnings revisions since the start of this year, and a continuation of this trend may take MNDY stock to new highs in the coming months. Because I used conservative assumptions in my model including a discount rate of 12%, I believe investing in monday.com at these seemingly fair prices is not a bad idea, especially for growth investors with an extensive investment time horizon. If interest rates decline toward the end of the year, I will be forced to use a lower discount rate in my model. We can use a sensitivity analysis to understand the impact of low interest rates by calculating the intrinsic value estimate for monday.com with different discount rates while keeping other variables unchanged.

Source: Author's calculations

monday.com is not cheaply valued today, but given the long runway for growth, seemingly fair valuation, and positive earnings revisions, I believe more gains are likely from here.

Takeaway

monday.com has positioned itself as a leader in the work management platform market by offering a flexible, customizable, and user-friendly solution. With its ability to integrate with various tools and automate workflows, the company addresses the integration challenges that often lead to software replacement. The AI integration and expansion into new markets will enable the company to progress toward enjoying long-lasting competitive advantages. Despite competitive pressures, I believe monday.com exhibits early signs of a market leader. This makes the company fairly valued today.

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