Brief Review Of monday.com’s Q4 2023 Report
Earlier this morning, monday.com Ltd. (NASDAQ:MNDY) reported stronger-than-expected numbers for Q4 2023, with quarterly revenues growing by 35% y/y to $202.6M and the Work OS platform company reporting a narrower-than-expected GAAP operating loss of -$1.1M [GAAP operating margin of -1% vs. -7% from a year ago period]. While monday.com is not profitable on a GAAP-basis, the company reported positive non-GAAP operating income of $21.2M (non-GAAP operating margin: 10%) and free cash flow of $55.4M (FCF margin: 27%) for Q4 2023.
Management commentary on Q4 2023:
Digging a little deeper, I see that the strength in monday.com’s result stems from its ongoing upmarket move into the enterprise area, and in particular new enterprise customer growth [$50K+ ARR customers grew 56% y/y in Q4]. In recent quarters, monday.com’s net retention rates have been moderating lower, and this trend continued in Q4, with overall NRR coming in at 110%.
According to management commentary on the Q4 earnings call, the negative trend in monday.com’s NRR is a direct result of temporary macro headwinds, and as such, this key metric is expected to start rising again in the back half of 2024 given impending changes to monday.com’s pricing.
Since, this is the first time in its history that monday.com is raising prices for its existing customer base, management expressed conservatism on the earnings call, which is also reflected in monday.com’s guidance for Q1 ’24 and FY-2024.
Given MNDY’s YTD run-up into earnings, I can understand why this conservative guide may be upsetting MNDY shareholders, who seem to be selling the stock in today’s session, with MNDY down double-digits at the time of writing.
Now, monday.com’s financial outlook for 27-28% y/y top line growth in FY2024 is more or less in line with consensus street estimates going into the report. However, monday.com expects its free cash flow margins to drop from ~28% in FY2023 to ~22% in FY2024 as the company plans to re-invest more aggressively into the Work OS platform [hurting the operating leverage story].
Considering monday.com’s relatively tiny market share (~1%) compared to its $100B+ total addressable market, or TAM, I wholeheartedly support management’s decision to increase R&D spending aimed at driving long-term growth. As of Q4, monday.com’s cash position stood at $1.16B and the company has little to no debt, which means monday.com’s balance sheet is in great shape, and I see no liquidity problems for the foreseeable future.
With all of that said, monday.com’s growth rates are still in deceleration mode, and sales cycles haven’t shrunk back down amid persistent macro headwinds. Hence, today’s selling pressure in MNDY stock isn’t necessarily unjustified. As a long-term investor, I continue to view monday.com’s platform expansion, declining customer acquisition costs, and healthy retention rates as ample reasons to consider an investment in MNDY stock. However, let’s reevaluate monday.com’s long-term risk/reward in light of its Q4 2023 report to see if MNDY stock is worth buying here.
MNDY’s Fair Value And Expected Return
Amid persistent macroeconomic uncertainty, monday.com’s platform expansion continues to look very promising as organizations (small and large) are looking for bundled offerings to save on costs (consolidation).
Despite facing macro and geopolitical headwinds, monday.com continues growing like a weed. While monday.com is still not profitable on a GAAP basis (nearing breakeven), it has turned operationally profitable on a non-GAAP basis, and I see an FCF monster in the making. Having a cash cushion of ~$1.16B and little to no financial debt should allow management to remain aggressive during the impending downturn in their push for higher market share.
To implement a margin of safety and account for monday.com’s increased scale, I have reduced my 5-year expected sales CAGR growth assumption from 30% to 25% in our valuation model. Furthermore, monday.com has now proven its FCF generation ability and the business is operating close to breakeven profitability. Hence, I am reducing the required IRR (discount rate) from 20% to 15%. All the rest of the model assumptions are unchanged and relatively straightforward. If you have any questions, please feel free to share them in the comments.
Here’s my updated valuation model for monday.com:
While MNDY is basically trading at our updated fair value estimate of $204 in pre-market hours, the long-term risk/reward isn’t looking all that favorable with MNDY’s 5-year expected CAGR return of 9.65% falling well short of our investment hurdle rate of 15%. Henceforth, I am downgrading monday.com to a “Hold” rating.
Over the last year or so, I have issued two “Buy” ratings on MNDY stock, once in the low-$100s in Dec-2022 and then in the mid-$100s in May-2023:
In my view, monday.com is a fantastic business that will continue to grow at a robust clip for several years to come. While monday.com Ltd. stock isn’t overvalued like a lot of its large/mega-cap tech peers, the long-term risk/reward doesn’t make sense for fresh capital allocation at this price. At TQI, we own a ~1.8% position in MNDY within our Moonshot Growth strategy, with a cost-basis of $111.70 per share. For now, we will continue to hold this winner, but we won’t be buying more until and unless MNDY stock experiences a significant price or time correction. If the stock keeps rallying higher (risk/reward worsens significantly) in upcoming weeks and months, we will trim in accordance with our portfolio rules.
Key Takeaway: I rate monday.com Ltd. stock “Hold/Neutral/Avoid” at current levels.
Thanks for reading, and happy investing. Please share your thoughts, questions, or concerns in the comments section below.