TEAM - monday.com: Inflecting Now

2023-05-22 16:00:25 ET

Summary

• monday.com Ltd. has its customer base at 59% of the Fortune 500, up from 52% in the same period a year ago.
• monday.com's revenues are moving higher at a rapid clip.
• Meanwhile, monday.com stock is still, even now, down 90% from its all-time highs.

Investment Thesis

monday.com Ltd. ( MNDY ) put out a very impressive Q1 result that I believe investors are not sufficiently paying attention to.

monday.com is not only rapidly growing on the topline, but it's also doing so by targeting its platform toward bigger enterprises.

And on top of that, the business is rapidly becoming more profitable.

There's a lot to like in monday.com from this valuation.

Why monday.com? Why Now?

monday.com is a collaborative platform for teams. Think of it as Atlassian Corporation ( TEAM ) meets Asana, Inc. ( ASAN ). It's like Asana in that it allows teams to manage their work. And monday.com is like Atlassian in that developers can customize monday.com's features.

monday.com is a low-code platform due to its visual interface, but it does not quite provide the same level of integration capabilities as Atlassian. It's more of a stepping stone for companies that haven't got the full depth of developers to bring out the maximum output from its Operating System (''OS''), that Atlassian requires.

As we headed into its earnings results a few weeks ago, I said in a bullish article:

I believe that monday.com could revise its full-year revenue target upwards, to the delight of investors.

In fact, I went so far as to title that article "Guidance Will Be Revised Upward." Along these lines, I now discuss what's next for monday.com.

Revenue Growth Rates Continue to Impress

As noted above, monday.com upwards revised its outlook for 2023. I believe that since monday.com was able to deliver such an impressive Q1 result , this bodes extremely well for the remainder of 2023.

After all, given the challenging macro environment, together with the very tough comparison with last year's Q1, if monday.com can grow in Q1 by 50% y/y, the rest of 2023 should be smooth sailing.

Next, if you've followed my work before you'll have seen me articulate, that one of the best setups for investing in a stock is when the stock is both cheaply valued and analysts are upwards revising their revenue targets.

What you see above, is that over the past several months, analysts have been slowly upwards revising monday.com's revenue estimates. As an investor, the last thing you want is to fight the sell side. While that strategy sometimes works out well, for the most part, it's a high-risk strategy that I don't support.

But the best reason to be bullish on monday.com is discussed next.

The Inflection Quarter

Back in February, monday.com provided investors with the following outlook for 2023.

At the time, investors were asked to be patient while monday.com continued to improve its cost structure, with the hope that in 2024 the business would reach profitability.

In fact, as I noted in my previous article:

High gross margins businesses aren't being rewarded. What investors want is a profitable business, preferably GAAP profitable.

And then, just over 60 days later, monday.com

What you see here is meaningful progress in Monday.com's outlook in a short period of time. Something that's very bullish.

So, what's the message coming out of monday.com? That the business has hit an inflection point.

But I wish to make one final point clear: despite monday.com moving rapidly to improve its underlying profitability profile, it hasn't done this by sacrificing its growth opportunities.

As you can see above, in Q1 2023, customers spending more than $50K per year on monday.com were up 75% y/y.

This insight, when taken together with the fact that 59% of the Fortune 500 are now customers of monday.com, up from 52% a year ago, demonstrates two noteworthy elements.

Firstly, monday.com's customers have the wherewithal to withstand any slowdown in the event of a recession.

Secondly, its strong customer adoption demonstrates a broad appeal amongst its enterprise customer base.

The Bottom Line

In my previous article, I concluded by saying:

If monday.com can continue to deliver upon its guidance and get investors to buy into the prospect that the business will end 2023 at non-GAAP breakeven or better, then this stock could easily move higher, rapidly.

I continue to believe that this is a fair assessment of monday.com stock prospects. Even though the monday.com Ltd. share price has moved up slightly in the past few weeks, today investors have significantly more visibility into 2023, and there's meaningfully less risk on the table than when I previously made the above assertion.

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