monday.com: With multiples this high, there’s more risk than reward (NASDAQ:MNDY)

For my part, now’s the time to watch out, not grasping. The S&P 500 is hitting all-time highs and the very actual chance that buyers’ expectations for a charge reduce might not materialize and the Fed hints at a slower tempo reactionswe ought to be particularly cautious with extremely valued expertise shares.

Monday.com (NASDAQ: MNDY), specifically, these are shares which can be liable to falling. The work administration software program platform, one of many fastest-growing corporations in its class, has already posted almost 30% development this 12 months. And whereas the basics proceed to be stable, I see myriad dangers forward.

I provoke monday.com with a to promote ranking. My bearishness is pushed by 4 key crimson flags:

• Competitors. monday.com operates in among the best areas of enterprise software program, from workflow administration to CRM. It tries to be one thing for everybody, however in doing so I feel the corporate dangers shedding out to larger manufacturers.
• A slowdown in internet holdings and upside dangers. monday.com’s 30%+ income development thus far is partly pushed by value will increase that went into impact in February. The influence of this value enhance on outflows, in the meantime, continues to be unknown. In the meantime, internet revenue retention figures have declined in comparison with earlier years.
• Revenue margin development might sluggish. Whereas most tech corporations are making modest headcount will increase, monday.com plans so as to add 30% to its workforce this 12 months, primarily in analysis and growth (sometimes high-paid engineers). Rising headcount on the identical charge as income development, particularly when a few of that income development is fueled by value will increase to be matched subsequent 12 months, is just not a surefire components for increasing margins.
• Wealthy evaluation. monday.com already trades at extremely excessive valuation multiples that go away little or no room for development.

Keep away and make investments elsewhere.

monday.com: Is the platform caught within the center?

For buyers new to monday.com, the corporate is a multi-functional work administration platform that has three major product traces: Monday Work Administration, a workflow and challenge administration software; Monday Gross sales CRM, which is a gross sales administration and buyer monitoring software; and Monday Dev, which goals to advertise technical growth groups.

The principle thesis of the corporate is that rising companies are normally caught between two troublesome selections: utilizing off-the-shelf software program that’s too inflexible in design and can’t scale as the corporate grows, or utilizing bigger and extra advanced options that are extra enterprise-oriented, costlier and extra advanced to implement, and too advanced for easier wants.

Nevertheless, we additionally should admit that in striving to be a middle-of-the-road platform, monday.com is up in opposition to a bunch of extra refined, enterprise-focused instruments. Alternatively, monday.com’s value enhance will make it extra reasonably priced for smaller members to hitch (the usual plan now prices $12 per seat monthly).

One of many major drivers of monday.com’s development is its transfer into the high-end market. The corporate has finished a superb job of each creating new company accounts and rising current accounts to larger spending ranges. In Q1, the corporate’s most up-to-date quarter, the variety of clients incomes greater than $100K in ARR jumped to 911, a sequential enhance of 78:

And but at this degree, and as monday.com continues to courtroom company clients, now we have to confess that the corporate cooperates with bigger and well-known corporations in every of the principle industries.

In workflow administration and growth, the corporate competes with Jira and Trello software program from Atlassian ( TEAM ). Different corporations taking a “middle-of-the-road” method and concentrating on mid-sized companies embrace Asana (ASAN) and Smartsheet (SMAR), each buying and selling at cheaper multiples than monday.com.

And in CRM, the record of rivals is nearly countless: Salesforce.com (CRM), HubSpot (HUBS), Oracle (ORCL) and SAP (SAP); together with smaller/personal rivals resembling Freshworks, SugarCRM and Soho.

In different phrases: we will not deny that monday.com competes in a really crowded area in every of the important thing software program industries, and it is arduous to argue simply because the corporate acts as an “in-between” choice between startup techniques and enterprise options, which in it’s any actual moat.

Income development is boosted by pricing, internet retention is down

We can’t draw back from citing one of many key positives for monday.com: its development charge is implausible.

As proven within the chart above, monday.com’s income grew 34% year-over-year in the latest quarter to $216.9 million. Nevertheless, it ought to be famous that in February the corporate started to conduct a wave-like enhance in costs.

The important thing query right here is will the value enhance finally result in extra churn, or will it push potential smaller members away from signing up on monday.com and finally increasing to a bigger scale?

Now, to be honest, the corporate has produced favorable churn information thus far. In accordance with Co-CEO Roy Mann’s remarks on the current Q1 earnings name:

One of many key drivers of our glorious efficiency within the first quarter was changes to our pricing mannequin. Please be aware that our pricing construction is being rolled out in phases. For brand spanking new Monday clients and people who invoice month-to-month, the brand new costs went into impact within the first quarter, whereas different clients will see up to date costs after renewal.

To date, the outcomes of the brand new pricing construction have exceeded our preliminary projections, underscoring the robust worth proposition of our merchandise. We’re significantly happy with the preliminary churn figures, with whole gross retention reaching an all-time excessive in Q1, persevering with development over the previous 12 months.”

However we should perceive that churn doesn’t occur in a single day. In an atmosphere the place IT prices are rather more carefully monitored, monday.com might really feel extra stress as a result of its resolution to boost costs. In different phrases, a value enhance is just not a easy chance: there’s additionally a danger of outflows that we might not have seen but.

On the identical time, we be aware that internet greenback retention figures are declining from 2022 (just like different corporations within the software program sector, as headcount reductions and tight IT budgets result in slower enlargement):

“Progress at any value” will not be the fitting transfer proper now

One other main danger to bear in mind: Whereas many tech corporations have deserted the “development at any value” mindset, monday.com definitely hasn’t.

On the intense aspect for the corporate, its current professional forma working margin reached a good 10%, up 10 factors YoY from 0% within the prior-year quarter, pushed primarily by a 7-point discount in gross sales and advertising and marketing bills. share of income.

However the firm can also be planning a big enhance within the variety of personnel this 12 months. The corporate has already added 133 staff within the first quarter of 1Q, and as proven under within the assertion from the 1Q shareholder letter, The corporate expects to extend headcount by ~30% in FY24:

Presently, monday.com is a Rule 40 inventory with a professional forma working margin of 10% and income development of 34%, displaying a very good stability of development and profitability. However with a pointy enhance in employees anticipated this 12 months, in addition to an elevated danger of attrition, that standing might not final lengthy.

Analysis and key findings

The final and most necessary purpose to keep away from monday.com: It is extremely costly.

On the present share value of round $230, monday.com has a market capitalization of $11.09 billion. After we calculated the $1.22 billion in money on monday.com’s most up-to-date stability sheet, the corporate’s the enterprise worth is $9.87 billion.

In the meantime, for the present fiscal 12 months, the corporate’s newest (raised) forecast requires income of $942 million to $948 million (29-30% YoY development) and an FCF margin of ~25%.

This places the monday.com multiples at:

• Income at 10.4x EV/FY24
• 41x EV/FY24 FCF

Sure, monday.com deserves an award for development and an award for its Rule 40 positioning. However even with its development benefit, can we defend the corporate’s premium in opposition to Asana (at ~4x income multiples for ~10% development) or Smartsheet and Salesforce (at ~5x income multiples for mid-teens development)?

For my part, there’s a a lot higher danger of degradation right here. Keep away and keep away from this inventory.