MNDY - monday.com Q2 Earnings Preview: Follow The 2-Step Rule For Success

2023-07-31 16:39:00 ET

Summary

• I expect monday.com Ltd. to revise its outlook for the full year 2023 based on positive market conditions and strong customer adoption.
• Companies are becoming more discerning with their software investments, and monday.com's low-code platform offers a valuable solution.
• A high customer adoption curve indicates growth potential and can lead to a higher revenue growth rate.
• Following the 2-Step Rule, I believe positive earnings results and analyst upgrades are likely to happen once the outlook is revised upward.

Investment Thesis

monday.com Ltd. ( MNDY ) is about to report its Q2 2023 results on the 14th of August, a Monday, and I suspect that it will upwards revise its outlook for the full year 2023.

The results we've seen from many companies thus far into earnings season show that companies' results are looking better than feared. Moreover, IT departments are once again inclined to spend on software, albeit in a more selective manner.

Given monday.com's strong customer adoption curve, together with a more favorable macro environment, I argue this bodes very well for this small-cap company.

Why monday.com? Why Now?

In my previous analysis titled Inflecting Now , I said,

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.

In that second paragraph lies the key advantage that monday.com brings to the table.

We are now in a market environment where IT departments are being forced to make cutbacks on excessive costs that have snowballed in the past few years as companies assumed they needed to embrace countless different products to remain relevant and safe in the work-from-home movement.

This has led to a proliferation of IT software, followed by a period of ''software digestion'' where only company products that offer IT departments clear and high ROIs are still being embraced.

Companies are still inclined to pay up for software, and the digitalization movement is still very much alive. It's only that IT departments are more discerning than they were 2 years back.

With that context in mind, allow me to provide you with further insights. If you've read my work before, you'll have seen how much emphasis I put on customer adoption curves. I've often stated that a customer adoption curve is more important than a company's revenue growth rates. Why?

Because any time you see a customer adoption curve where customers are moving in droves to a platform at higher than 30% y/y, you know that is a company that has something special that makes it a growth company. There's no need to overcomplicate this insight.

A high customer adoption curve will eventually translate into a high revenue growth rate. What's more, with more visibility into the end of 2023, I believe that monday.com will be well-placed to upwards revise its full-year 2023 revenue outlook.

After all, we've seen from this earnings season so far, that companies are returning to opening up their wallets. And as the saying goes, one company's spend is another company's revenue line.

This leads me to discuss what I've termed the 2-Step Rule.

Follow The 2-Step Rule

What you don't want to do as an investor is to ''fight the Street.'' You want to get in when analysts are busy pumping your stock but before the stock has fully taken off.

This is how it works.

When will analysts start to pump a stock? Typically, on the back of catalysts, earnings being a key example. Other examples could be large acquisitions, for instance. Refer to the graphic above. You want to see analysts upwards revising their revenue targets for a company. That's step 1.

Step 2 is, you need at least two back-to-back positive earnings results. And it's not a lot more complicated than this.

With everything that we've discussed above already, I suspect that monday.com will upwards revise its full-year outlook.

And when that happens, analysts will be busy upgrading their financial models and gushing over the company. And that's how this works.

However, the problem with investing is that it's more of an art than a science, so it's ''too easy'' to overcomplicate what is relatively easy.

But by having a clearly defined framework, and most crucially, sticking to this framework devoutly, positive returns can happen on average.

The Bottom Line

I anticipate monday.com will likely raise its outlook for the full year 2023 based on positive market conditions and strong customer adoption.

The current earnings season has shown that companies are performing better than expected, and IT departments are gradually investing in software solutions again, albeit selectively. monday.com's collaborative platform has gained traction, and its low-code approach makes it appealing to companies seeking to optimize their operations without extensive developer resources.

With a high customer adoption curve indicating growth potential, I believe monday.com is well-positioned to benefit from the ongoing digitalization movement and could see an upward revision in its revenue outlook, leading to positive reactions from analysts and potential returns for investors following the 2-Step Rule.

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