MNDY - monday.com: Sidestepping Macro Headwinds Pivoting To Growth And Profitability

2023-03-16 09:13:13 ET

Summary

• monday.com's latest quarter was exceptionally strong with revenues, earnings and free cash flow margins far exceeding expected levels.
• Of more importance, unlike many other high growth IT companies, the company raised guidance for both earnings and revenues.
• The company is enjoying noteworthy market share gains as it pivots its sales effort to larger users.
• Unlike competitors the company is not having to layoff members of its team to achieve noticeable improvements in non-GAAP operating margins.
• The company has achieved notable early success in its strategy to leverage its workflow technology to penetrate adjacent market opportunities.

monday.com: leading the charge in the workflow management space.

It was Monday when I started writing this article, and this is an article about the eponymously named company. That said, most readers and investors have been focused on market reaction to the news about Silicon Valley Bank ( SIVB ) and the steps that were taken this past weekend to resolve some of the issues involved in that collapse. Two days on, and the release of a CPI report which was less “hot” at least in details than had been feared and there is perhaps a bit less angst than heretofore about the many macro issues that have governed valuation in recent days and weeks. (Although today's angst is migrated to the outlook for Credit Suisse.) From the perspective of this writer, making depositors whole, but letting shareholders and bondholders suffer the consequences of their investments seems about the best that can be done with regards to managing the crisis. I don’t purport to have deep domain expertise with regards to bank balance sheets or matching demand deposits and long dated bonds. This is NOT the article for that kind of analysis, and it will not go near attempting to analyze the banking space and the risk to bank earnings and liquidity because of Fed activities now or in the future. Nor will this article attempt to forecast trends in inflation and Fed rate actions. I well realize that those will be animating factors in the valuation of monday.com ( MNDY ) shares in the coming days or perhaps weeks.

This article tries to analyze some of the dynamics in the workflow management space. My conclusion is that Monday is winning the market share battle, that its strategy of penetrating adjacencies is achieving noticeable success, and the company is in the early stages of a pivot to achieving non-GAAP profitability and significant positive free cash flow margins.

That said, I would be remiss if I did not attempt to at least provide some guesses as to the fallout from the demise of SVB on the specific business outlook for Monday. The company has 186K customers , and obviously some of these are smaller enterprises. 30% of its customers are in the tech space. Some of that 30% have been financed in whole or in part by SVB. It seems likely that there will be some transitory fallout as some of these businesses retrench and eliminate costs where possible. But the fallout is likely to be quite limited; the company has long since pivoted to a focus on larger customers who spend more than $50k/year and will be mostly unaffected by the collapse of SVB.

Investing in shares of Monday at this point will require investors to look through some of the macro risk and uncertainties, not just from the collapse of SVB, but from other macro headwinds as well. Overall market sentiment remains deeply negative with investors fleeing from anything they believe is risky or might have exposure to some questionable segment of the economy within the base of customers. I think the current share price of MNDY compensates investors for those kinds of risks, but the short term in terms of share price for Monday, as well as just about every other company in the IT space, is more than likely to be a bumpy ride for investors.

I waited to conclude this article so I could take a look at the earnings and forecast from a principal competitor in the space, Smartsheet ( SMAR ). Part of the investment thesis for Monday is that it is a share gainer. That remains the case, even though Smartsheet’s quarter was well above prior expectations. And part of the thesis for investing in Monday shares is that users continue to prioritize investment in workflow management despite macro headwinds, and the Smartsheet earnings report and its forecast, suggest that is still the case, although macro headwinds were noted by that company as well.

One of the things that has happened, given the high level of risk and uncertainty that is plaguing just about all forecasts from IT companies, and others as well these days, is that company forecasts have become significantly more conservative in an effort to provide a buffer for investors. Smartsheet actually specifically called out that its growth forecast was using a more conservative methodology than in the past, and the inference I drew from the monday.com conference call is that they also chose to try to de risk the expectations that they presented. Because of company efforts to “game” the forecasting process, comparing different forecast to each other is far less exact than has usually been the case. That said, however, Monday’s revenue growth forecast for the coming year is significantly higher than that of the other major competitors in the space, and the elements of its forecast give me significant confidence that the company will continue to gain share.

Workflow management has become a controversial space amongst investors in the high growth IT companies. The space has gone from a “must own” to one that is considered by many as a collection of commodity companies with little differentiation. There are, to be sure, a fair number of competitors in the space, and on the surface it does appear as though they all do the same thing. Competitors of Monday include, Atlassian ( TEAM ), Smartsheet, and Asana ( ASAN ) amongst the most prominent public companies. I owned Asana for some time in the model portfolio I maintain for subscribers to my Ticker Target service, and owned it as well in managed accounts. I rode the share up and then down, and wound up with a marginal profit and severe cognitive dissonance. One does wonder how the cofounder and CEO could spend so much of his net worth buying shares in the midst of a growth decline of some magnitude. And I do own shares in another competitor, Smartsheet. I have also owned Atlassian in the past, but currently have no position in those shares.

Asana shares rose notably in the wake of their recently announced earnings, but it is not earnings that has caused the share price reaction. The share price action is, I believe, more based on the CEO’s announced plans to enter a 10b5 acquisition program to buy another 30 million shares which would be 14% of the reported shares outstanding, but an outsize 40% of the current float . Earlier data from a service called Sensor Tower , which showed a significant growth in active users and a marked acceleration in downloads, apparently was only marginally correlated with actual results or the company’s forecast.

Overall, Asana’s forecast for high teens revenue growth for this current fiscal year seemed a bit pedestrian, regardless of the reaction of the shares to the announcement that the CEO would spend another $650 million on share purchases to go with his numerous previously announced share acquisitions. There probably isn’t any fundamental read through from the price action of Asana shares, and the outlook for Monday. Monday’s execs simply don’t have the kind of net worth that Asana’s CEO, Dustin Moskovitz is able to deploy.

But there is a part of the Asana earnings release and concomitant conference call that I believe is directly relevant to the outlook for Monday. Asana still loses lots of money. Indeed, it is getting some positive comment because its forecast calls for a non-GAAP loss margin of "only 18%", and that is after a pretty substantial layoff which has taken effect. Asana has, and will continue to temper its investment in sales capacity, and this has apparently made it easier for Monday to close deals. And while Asana is reducing its sales footprint, so too is Atlassian , whose Jira and Tello products are amongst the principle workflow management/communication tools in the space. When considering an investment in Monday shares, one consideration in this environment is that it is going to be facing less competition from two of its largest rivals than has been true for many years.

This is a report recommending the purchase of Monday shares. Monday is one of the larger companies in the workflow management space, at least as I define the space. It appears that it will become larger than both Atlassian and Asana in terms workflow management software revenues this year, while Smartsheet remains somewhat larger. While Monday is apparently gaining market share, the company appears poised to start to generate meaningful positive free cash flow. But one of the additional investment pillars for the company, in my estimation, is that it has taken its core technology, and extended it beyond just workflow management into several high potential adjacencies. I think that Monday will continue to grow faster than its competitors, gain share and ramp profitability over the coming quarters.

Before looking at what Monday does, why it has been successful, and its prospects for continued success, I need to make the point yet again that the company’s shares will not escape the overall market climate. Just how fragile market sentiment is with regards to high growth IT shares was on full display last Thursday/Friday when the issues at Silicon Valley Bk, First Republic Bk ( FRC ) and some other smaller financial institutions precipitated a mini-panic in which companies in the high growth IT space were peripheral casualties. Monday shares fell by almost 13% in the period after the problems that have now led to the liquidation of SVB first reached a broad audience as a knee jerk reaction to fears of a banking crisis.

In writing this article, I am fully aware that Monday’s shares price performance is going to be swimming upstream until overall investor sentiment in which safety seems to be valued more than opportunity eases. I obviously have no perspective as to when that might happen. It probably needs some kind of consensus view that the worst of inflationary pressures are receding and the Fed is done with its rate hiking program. Recommending the shares of Monday is a long-term call. I think that the company has established a leadership role in its space and it will leverage that role to sell customers a broad array of products, while being able to leverage that growth into rising operating and free cash flow margins.

At the end of 2022 Monday had $886 million of cash and equivalents on its balance sheet. There is no indication that any of its cash was on deposit at Silicon Valley Bank, and the company, unlike many other companies, has not chosen to file any reports suggesting it had cash on deposit at SVB. At this point, with all SVB and Signature Bk. depositors having complete access to their funds, that doesn't seem to matter. monday.com has no debt, and it is cash flow positive, so it has no need for credit from financial institutions. Because of its Israeli domicile, it is less likely that Monday has had a substantial relationship with SVB. That said, the indirect effects of the closure of SVB are likely going to be far reaching.

The failure of SVB is obviously going to have some impacts on many facets of the IT space-and of course many other spaces as well. SVB has been a significant lender to IT start-ups of all kinds. It was that strategy that was one of the factors in the bank’s failure, as many start-up IT companies, typically funded by VCs, used their cash balances at SVB to maintain solvency, in turn requiring the bank to sell a significant portion of its Treasury portfolio, and recognize substantial losses.

While I have no direct knowledge of SVB’s loan portfolio, it would be surprising if some of its clients were not current and potential competitors of Monday. So, on the one hand, the failure of SVB is going to diminish aggressive competition from private unprofitable vendors in the workflow management space. The flip side of that is it seems likely that some fraction of prospective buyers for Monday’s solutions will become even more cautious and require additional justification before placing orders. While I think that Monday’s guidance was conservative at the time it was provided, the failure of SVB, and the crisis of confidence that this failure-and perhaps the issues at Credit Suisse as well- has engendered, may make the IT buying environment even more difficult than has recently been the case with buyers holding back on some purchases as they fret about the outlook for their own businesses. Just how much this fear factor might cause IT purchases to contract is totally unknowable and it would be a mistake to be alarmist and suggest that the sky is falling on the IT space, more than has already been the case.

It has been typical in scenarios in which a bank failure challenges liquidity for the Fed to take policy action, and that is why, of course, rates on Treasuries fell sharply on Thursday/Friday/Monday. Ultimately a lower terminal rate on Treasuries will have a positive influence on IT purchases, albeit with some lag. It seems probable that signs that the Fed is reacting to the implosion of SVB by completing its rate hiking cycle, and pausing its balance sheet run-off are likely to have positive impacts on high growth IT shares.

Monday shares spiked mightily during a risk-on market cycle that ended 16 months ago, and subsequently descended to a more earthbound valuation. I think their valuation makes sense at this point, that guidance is properly conservative, and the competitive environment favors this company. But I believe that the shares, are going to respond as much or more to macro issues than they will to the company’s actual operating performance or its outlook in the short term, as investors try to adjust to an altered environment in the wake of the failure of SVB.

There is, to be sure, some correlation between the health of the company’s customers and prospects, and Monday’s ability to sell its software to them. While the company enjoyed a halcyon year, and achieved quarterly performance far better than feared or forecast, the stock price fluctuates in sympathy with that of other high growth IT shares. This is not because there is some close correlation between macro conditions and the outlook for this company’s business. The market penetration of workflow management is still in its early days with few users, especially large users, having deployed workflow management tools on a universal basis. Further, Monday, compared to its rivals has embarked on product journey into adjacencies that is already driving growth a surprising level of growth. But Monday’s valuation is going to be a function of risk appetites in the market. This article doesn’t try to handicap inflation rates or job growth, or how those macros inform the debate about the size of the next Fed rate increase.

Workflow management software , for those unfamiliar with the technology, is a modern day, tech-driven implementation of GANT charts . Basically, this software affords enterprises the ability to view the progress of particular projects/tasks, look at dependencies and identify any potential issues with completing tasks or threats to schedules of a particular project.

The software does work well with measurable results, according to checks I have made with some users. One of the problem the software does solve is to end the frustrating and time consuming practice of interminable and frequently repeated meetings about work. If that sounds like a personal peeve, it is. Back in the day, long ago and far away, I was involved in numerous “task forces” designed to rescue failing projects. Even chaired a few along the way. Tremendous waste of time. But those practices were endemic in the tech world then, and they still are.

Enter workflow management software. Workflow management by itself won’t get work completed. It will provide early warning signs to managers that their project schedules are in jeopardy, and what particular process or task is causing the risk to the schedule. The software generally does improve team collaboration behavior and it certainly saves lots of time that has been set in status meetings. There are other ways to get the same kinds of results, but this software does enhance work experience for team members and makes it much easier on managers to…well management projects.

Workflow management will not, by itself, solve all of the problems of getting teams to communicate efficiently, and eliminating the dependencies that often upend schedules. It is a framework that at least at some level is less annoying and mind numbing than other practices to try to improve the productivity of teams involved in many kinds of development efforts. While work-from-home is no longer a craze, it does seem to be a permanent component of the landscape for a significant number of companies. Workflow management is a tool that helps managers and an overall enterprise, to keep control of employees who aren’t permanently tethered to a physical location in close proximity to other team members.

Like most other crazes in the enterprise IT space, the solution has been over-hyped. And many adopters have been large companies in the IT space itself, and as they have cut back employment, the growth of one of the industry leaders has fallen precipitously. While I have to question some of the 3 ^rd party research on the subject, the current market size is said to be $11.5 billion this year and the CAGR over the coming 5 years+ is forecast to be an eye-popping 33%. Here is a link to one market research report that says workflow management software spend will be $86 billion by the end of the decade. I think it is not terribly likely that users will be spending $86 billion on the kind of software I regard as workflow management. Some, or perhaps most of the companies identified by consultants as participating in workflow management, do not really offer solutions that do precisely what I have identified as key components in a workflow management solution. But even discounting the results of the third party analysts, their reports, after removing hype, still suggest that this is a large, rapidly growing market, and will have multiple winders. Like many pendulums in the IT investing world, I believe this one has swung too far toward the negative poll.

Monday’s recent results and its guidance-Slowing percentage growth, with a turn towards profitability: it’s indicating market share gains compared to rivals

Recently, monday.com reported a quarter that was a considerable positive surprise, and especially so in the current environment for IT businesses. In the wake of that report, which also contained a forecast above the prior consensus, the shares rose as much as 25%+, although as is often the case these days, the shares have pulled back about 19% from the high point they set after earnings. At this point, the shares are about 4% above the low they set just before the earnings report, and are up by 12% from the start of 2023 which is fairly typical appreciation for many high growth IT shares.

Of course the shares are still down by more than 64% from the high they made in the fall of 2021. It was recently reported that ARKK sold some shares of Monday; given the small magnitude of the sale, I am not sure how much the transaction actually means in terms of ARKK’s view of the company and its prospects.

I initially wrote about the shares about a year ago on the SA site after their massive valuation reset. The shares are actually marginally higher than they were a year ago, not all that common in the IT space. Monday shares have been volatile, and often more reflect the market sentiment towards high growth shares than any evaluation of the company’s outlook. That kind of trading pattern is not likely to stop any time soon; the ability of the shares to appreciate in a risk-off market is not substantial to say the least.

Before looking at the quarterly numbers in detail, I need to mention that monday.com uses stock based comp. Last quarter, stock based comp was about 16% of revenues, a notable decrease from the 23% of revenues reported in the year earlier period. The company’s outstanding share count grew by about 3.5% over the last 12 months. Thus, I am using 49.9 million shares in the valuation metrics I present in this article. If the company is profitable for the full year-and that is a distinct possibility despite the current guidance, outstanding shares will be 4% higher than I have forecast because the accounting convention requires 2.7 million additional shares to be counted from option grants and from RSU’s. But as the company is forecasting a 5% non-GAAP operating margin loss, I will not include those shares in any valuation calculation.

Last quarter, Monday reported that its revenues grew by 57% and by 9.5% sequentially. This was about 6% greater than the company’s prior forecast. The company reported a non-GAAP operating margin of 10% last quarter, yielding EPS of $.44. The company had forecast a non-GAAP operating loss margin of 15% and the prior consensus EPS forecast had been for a non-GAAP EPS loss of $.37.

The company does not explicitly forecast free cashflow margins. Last quarter, free cash flow margins were 20%, up from 11% in the year earlier period. The growth in free cash flow was essentially a function of stronger profitability.

This was the first time the company provided guidance for the current year. The guidance provided was an upside compared to the prior consensus. In terms of earnings, the company is forecasting a non-GAAP operating loss margin of 5%, and that equates to a non-GAAP EPS loss of $.37; the prior consensus had been for an EPS loss $1.50. Revenue growth for the full year was forecast to be 34% or a forecast of $690 million, above the prior consensus which had been for revenues of $662 million, but far below recent performance. It is a rare IT vendor these days that is raising its revenue forecasts, almost regardless of recent performance and with the risks to the economy of the SVB implosion also to be considered, prudence in forecasting is obviously something very desirable.

The company is forecasting Q1 revenues of about $156 million, which is 4% sequential growth from the level reported for Q4. Given the strong 120%+ net revenue expansion rate the company has consistently achieved, this forecast seems exceptionally conservative, especially considering the company’s newly announced partnership with Appfire which has a strong presence in the market for workflow management tools. Historically Appfire has been Atlassian focused , so becoming a partner with Monday is quite a significant turnaround. I am not suggesting here that I have any proprietary or unique knowledge concerning how Monday’s quarter will play out, and I certainly am not suggesting that readers buy the shares as a speculation on the quarter. But I do think the set-up is better than most in terms of the likelihood for the company to exceed guidance.

Why is Monday growing faster than its market? Is it sustainable?

There are two somewhat interrelated reasons for Monday’s success. One factor is its market share gains in the work management space. The other pillar of its differentiated growth is the success of its foray into adjacencies, and in particular its CRM product. Does Monday’s technology offer users a superior experience? Trying to evaluate the differences in functionality between the different workflow management vendors is frustrating at best. The different pieces of functionality that each of the competitors offer can be mind-numbing in their detail and basically inexplicable to readers who are not immersed in working in teams-and that includes this writer to a significant extent. In doing my diligence to write this report I looked at the competitive analysis that was available, and I have linked to one such study here . That said, I don’t think reviewing them will provide a great deal of insight in terms of evaluating Monday shares as an investment. I have linked to a FobesAdvisor analysis that compares Monday to Asana. It rates Monday quite a bit higher than Asana, but I am in no way suggesting that Monday’s success is a function of its higher rating. In fact, while Asana has 200 integrations, and Monday has 50 is definitely an advantage for Asana. I have also linked here to an analysis from Project Management.com which indicates that Monday is rated more highly than Jira. From what I learned through contacts is that most users rate Monday more highly than competitors when it comes to ease of customization. For larger users, one size just does not fit all. These enterprise users all have specific features that they wish to embed in their workflow management paradigm. It is easier to do so using Monday than Asana. Jira is apparently not meant to be customized at all.

Given the leadership at both Asana and at Atlassian (Jira’s parent company) I wouldn’t expect that Monday will always have a higher rating than its competitors with regard to product functionality and ease of use features. It seems to be in that position today, and that is likely a factor in its differentiated performance. In my view, nonetheless, the key reason I expect Monday to outperform competitors in terms of percentage revenue growth over the coming year, and perhaps longer is the fact the competitors are cutting back, while Monday is not. Both Asana and Atlassian are making and have made significant layoffs and these layoffs have impacted their sales capacity and their coverage. It is a lot easier and more efficient to sell when competitors are not contradicting a sales presentation and presenting an alternative set of solutions. And that is what I see happening in this space at this point.

The other major factor that is animating Monday’s higher growth is its push into adjacencies, and most particularly into CRM. Monday’s CRM has been an outgrowth of its core workflow management technology. The company determined that many users were actually customizing their Monday installation to use in a CRM role within their organization. Monday’s tool is considerably more basic than what is available from the well-known companies such as Salesforce ( CRM ), Oracle ( ORCL ), SAP ( SAP ) and Microsoft ( MSFT ) users associate with this space. It is also far, far cheaper-it’s most popular plan which it calls Standard costs $14/seat/month , with a minimum of 3 seats. It has turned out that many organizations wanted to empower their employees with basic salesforce automation functionality, but needed a product at a price point that made sense for large scale deployment. And that is what Monday CRM is all about. Monday CRM recently received an award from G2 ; of course as the link shows there are other products recommended, but many observers consider this endorsement of such a new product to be well worth having.

The results for Monday have been quite encouraging. At this point Monday is not selling its CRM product to its installed base; its plan is to continue to enhance the functionality so it represents significant added value for installed customers. But despite that limitation, 50% of Monday’s new paying customers are actually CRM customers, while the balance are split between what Monday calls its marketer product and development tools. Is Monday CRM a suitable alternative for what is offered by Salesforce? That is a complicated question. Salesforce Ventures has actually made a $75 million investment into Monday. I have linked here to a recent analysis comparing the two offerings. Basically, Monday CRM is for users looking for a basic CRM solution that doesn’t offer the many, many bells, whistles and everything else that a company with the scope of Salesforce brings to the table. It is probably going to continue to drive growth for Monday for years into the future. What appears to distinguish Monday’s offering is its flexibility. Reviewers believe that it far easier to customize Monday CRM than anything else available in the space.

Monday also has taken its platform and designed a product it calls Marketer. It is designed for a specific slice of functionality rather than a broad, non-specific workflow management requirement. I have linked here to a description of the product here.

Finally, a mention should be made at least about Monday DB. This product will not be impacting revenues this year but seems likely to be a growth driver in 2024. DB is basically a platform product that is designed to be used by developers who want to develop specific apps using the Monday infrastructure. It is probably not really feasible at this point to try to handicap the possible revenue generation from the offering that is, in any event, a year away.

My expectation is that Monday will grow faster than other vendors in the work flow management space for the foreseeable future. It is a principle pillar of the investment case for these shares.

Monday’s business model-Evolving towards non-GAAP profitability.

Last quarter Monday reported a non-GAAP operating margin of 10%, compared to a non–GAAP loss margin the year before. As indicated earlier in this article the improvement was not a function of rising share based comp; it was a function of the rapid growth in revenues coupled with an element of expense discipline.

The company actually ended up with a decline in headcount sequentially, and saw an overall sequential decline in non-GAAP operating expense. In terms of specifics, non-GAAP gross margins were 90% consistent with year earlier levels. Research and development expense rose by about 60% year on year and were 16% of revenue. Monday is domiciled in Israel, and like many other Israeli companies, it benefits from favorable developer costs. Non-GAAP research and development costs actually declined marginally on a sequential basis.

The largest improvement in opex cost ratios was in sales and marketing expense. In Q4, sales and marketing expense fell to 54% of revenues, compared to 73% of revenues in the year earlier period. Sales and marketing expense also fell modestly on a sequential basis. The company CFO said on the call that it cost less to acquire customers-perhaps, he opined, because some sales were less competitive than in the past due to a pullback in the market from competitors.

General and administrative expenses were 10% of revenues, down from 12% in the year earlier quarter. G&A expense also showed a small sequential decline.

The company’s forecast is for sequential revenue growth of 4% while it is forecasting sequential growth in operating expense of more than 20%. That implies a great deal of hiring in a quarter, and seemingly belies comments about a cautious approach to spending that was articulated on the conference call. I think the forecast presents investors with a favorable set-up with regards to short-term earnings expectations.

The company generated a free cash flow margin of about 20% last quarter, compared to 11% in the year earlier period. While some of the improvement in cash flow came from balance sheet items, most of it reflected improved profitability. The CFO forecast that the company would be generating cash flow throughout the year; I am not sure how that might happen if the company has a non-GAAP operating loss of $18 million in Q1. Again, it creates a good set-up for investors.

In considering cost ratios, the most encouraging note is the substantial improvement in sales and marketing. Part of the investment thesis here is that with issues at two of the company’s major competitors it really is costing less to acquire customers, and that the pivot to larger accounts is creating further efficiencies in the sales force. The company’s full year guidance for 2023 calls for an improvement of about 400 bps in non-GAAP operating margins. Of course, operating expense ratios are highly dependent on revenue growth, but given that sales and marketing expense, despite improving substantially was still 54% of revenues last quarter and was 69% of revenues for the full year, there is a substantial opportunity for the company to achieve dramatic operating leverage in that expense category, far beyond what the guide implies for 2023.

By comparison, Atlassian, which has a very different business model, spent 17% of its revenues on sales and marketing last quarter and it is laying off 7% of its staff, including some in the marketing area. Asana spent 67% of its revenues on sales and marketing last quarter, but it is reducing that ratio sharply in the current fiscal year. I would be surprised if Monday wasn’t able to reduce its sales and marketing expense ratio by far beyond the few hundred basis points implied in this year’s guide.

Wrapping up-Monday’s valuation and reviewing the investment case

Monday shares are quintessentially volatile. As mentioned, they often track the change in the WCLD ETF but with far greater daily volatility. The valuations here are based on the closing price for the shares on 3/13/23. Further, to account for dilution from stock based comp. I am using an estimated share count of 49.9 million shares compared to the 47.7 million shares that were outstanding on 12/31/22. The 12 month forward EV/S ratio is about 8X. That is above average for the company’s growth cohort in the high 30% range. I have estimated that the company will have a free cash flow margin of 6% next year compared to about 2% this year. That increase is consistent with the improvement the company is forecasting in its non-GAAP operating margin for the current year. Many growth vendors have made margin expansion a priority. Thus, on a relative basis, Monday’s valuation based on the combination of growth and margins is a bit greater than average for the company’s growth cohort.

So why buy Monday shares if their relative valuation doesn’t screen at exceptional levels? One is visibility. I think it is self-evident that IT demand growth has hit a pretty substantial speed bump. The tide is going out, and it is leaving lots of boats grounded. Share gainers, as Monday is, have some extra water under their keel since they are not entirely counting on the growth of their space in order to achieve their revenue targets.

It is also notable that part of the market share gains Monday is achieving are a function of slackening investment on the part of major competitors in the space. Two major competitors, Asana and Atlassian are laying off team members. It was noteworthy, at least to me, that Monday was able to over-attain its sales targets last quarter, despite a bit less headcount, and a small decline in actual sales and marketing spend. I expect that this is a function of fewer competitive engagements as much as anything else.

Another component of Monday’s market share gains is its push into adjacencies. There is a bit of a virtuous circle at work here; because of the market shares gains the company is achieving it is able to fund more projects, and to introduce additional features/functions that are important to different user segments. In turn, this elevated growth is part of the market share gains the company is achieving in the space.

Like most other tech companies these days, Monday’s non-GAAP margins have been rising, and its latest earnings report featured earnings and free cash flow margins far above prior forecasts, and the consensus expectation. The company has forecast continued gains in margins this year, but at a relatively subdued cadence. But unlike many other IT company’s Monday is forecasting that it will be able to achieve that result without layoffs, something that enhances its opportunities to drive efficiencies. In fact, I believe that while the company’s revenue growth forecast is realistic, given the likely additional headwinds created by the implosion of Silicon Valley Bk. and the various ramifications of that development, I think it likely that it will over attain its current margin forecast.

To reiterate, Monday shares are volatile, and it is highly unlikely that they can achieve sustained positive performance until the fragile state of investor confidence, and the extremely negative investor sentiment start to improve on a sustained basis. I believe that the shares will be one of the leading performers in a more risk-on environment and their current valuation in no way reflect the company’s opportunities in terms of market share gains, and an improving margin trajectory.

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