MNDY - monday.com Sustains Its Track Record Of Impressive Growth

2023-04-21 11:03:39 ET

Summary

• monday's Q4 2022 results are impressive with a continuation of 50% sales growth, not failing to meet expectations.
• Other players within the work management market are also observing favorable growth during 2022.
• As Asana demonstrates significant progress in securing major clients, monday's investment in the enterprise sector intensifies the competition in the space.
• monday has an expansive toolset, but it needs more differentiated product offerings for large enterprises.

monday.com ( MNDY ), operating within the work management market, stands out as one of the rare software companies that can consistently achieve a 50% growth rate in 2022. Despite a notable decline in stock prices over the past year, MNDY 's business is thriving with an improved market position and product lines. In this article, I will provide share some of my thought about this stock.

Q4 2022 Update

MNDY's Q4 results demonstrate impressive growth and profitability. The revenue of 150M, along with a YOY growth rate of 57%, is particularly noteworthy. The enterprise customer base grew by 86%, with over 1474 customers having an ARR of over 50,000 dollars. The new CRM product is performing well, as the company added 2,458 new CRM accounts in 2022, with 76% of customers having 10 or more users. Moreover, MNDY achieved a positive adjusted operating profit for the first time. It reduced its operational costs to 95% of revenue, a significant improvement from last year's 120%. It also generated 30 million dollars in free cash flow, which is a very positive sign for its financial independence. MNDY's balance sheet is strong, with 886 million cash and short-term investments in 1039M total assets. Overall, I think this is a very high-quality business that delivers profitable growth with no concerns about funding its operations.

Work Management Software is in Demand

MNDY 's growth is not alone in the work management industry, as competitors like Asana ( ASAN ), Atlassian ( TEAM ), and Smartsheet ( SMAR ) also delivered favorable revenue trends (as shown in the chart below). However, MNDY did present a faster growth rate than the rest, which is very significant considering the tough macro environment we are in. I think project management overall actually benefits during the inflationary environment and economic slowdown since businesses need those tools to improve efficiency and cut costs.

monday Takes on Asana in the Enterprise Market

In terms of project management and planning software, Smartsheet, Atlassian's Jira, monday, and Asana are some of the most well-known players in the market. In my opinion, Smartsheet is a more advanced version of Excel, while Jira is mainly used for IT-related tasks. monday and Asana have more overlapping functionalities that provide user-friendly interfaces with project management and visualizations, such as Gantt charts and Kanban boards.

According to the chart below, monday experienced a decrease in retention rates for its largest customer segment (50K ARR) from 145% to 135%, while Asana saw a smaller decrease in retention rates from 140% to 135% for larger customers with 100k+ ARR. Both Asana and monday have focused on serving larger enterprise customers in recent years. Asana's revenue is highly concentrated in customers paying 5k or more, accounting for 73% of their revenue, while monday's accounts with 10+ users represent a similar level at 76% of revenue. It seems that Asana has a more substantial concentration in large enterprises than monday.

Seat Penetration is Still Unclear

Asana's Q4 2022 earnings call revealed that the company has several customers with over 10,000 paying seats, which is a significant accomplishment and demonstrates their ability to implement their software in cross-functional and cross-departmental environments. Asana has already established a strong enterprise customer base, with eight of the top ten tech companies and 80% of the Fortune 100 as their clients. This positions them well to expand their penetration within their existing customer base. Their tools for goals, portfolios, and workflows are aligned with large organizations, while monday does not have these tools. monday's performance in seat penetration is less clear, as they provided limited examples during their Q4 earnings call. The only description they shared during the Q4 call was that:

Up until a year ago it was around 2000 seats, we increased it to 5000. That means that we're able to close those deals quicker and quicker.

Bottom Line

monday has been performing very well and gaining market share in recent quarters. With a large market opportunity and global scale, I believe it should be able to continue to deliver above-average growth in the near future. monday is still benefiting from a strong tailwind in the industry, where there is no real test of competition. As their CEO stated in Q4:

When we're looking into new customers that joined the platform, we still see that greenfield, also the majority of the deals we do are not against any other competitor.

The business appears to be well-managed, as executive officers and directors own more than 20% of the shares. Another 28% is held by venture capitalists, which could put some downward pressure on the stock price if it rises too quickly.

Overall, monday is trading at a premium to the overall software market, with a price-to-sales ratio of 11.3x compared to the industry average of 7.6x. There is also a risk of future share dilution, as many of monday's product development pipelines are still incomplete. Asana, on the other hand, is trading at a discount, with a price-to-sales ratio of 6.5x. Despite its lower growth rate of 35%, I believe Asana's growth is of higher quality than monday's. This is because Asana has demonstrated its ability to land large deals and engage with CIOs of the world's largest companies. Its automation tools are also more differentiated.

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