Brief review of monday.com’s Q4 2023 Report
Earlier this morning, monday.com ltd. (NASDAQ:MNDY) reported stronger than expected numbers for Q4 2023with quarterly revenue growing 35% year over year to $202.6 million and the Work OS platform company reporting a narrower-than-expected GAAP operating loss of -$1.1 million [GAAP operating margin of -1% vs. -7% from a year ago period]. While monday.com is not profitable on a GAAP basis, the company announced Positive non-GAAP operating income of $21.2 million (non-GAAP operating margin: 10%) and free cash flow of $55.4 million (FCF margin: 27%) for Q4 2023.
Management comment for Q4 2023:
Digging a little deeper, I see that the strength in monday.com’s result stems from its continued upward movement in the enterprise space, and in particular the growth of new enterprise customers. [$50K+ ARR customers grew 56% y/y in Q4]. In recent quarters, monday.com’s net retention rates have been moderately lower, and this trend continued in the fourth quarter, with the overall NRR coming in at 110%.
According to the management’s comment for T4 earnings of T4The negative trend in monday.com’s NRR is a direct result of the temporary macro headwinds, and as such, this key metric is expected to start rising again in the latter half of 2024, given the imminent changes in monday prices .com.
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 Q1 ’24 guidance. and FY-2024.
Given MNDY’s YTD run on earnings, I can understand why this conservative guidance might worry MNDY shareholders, who appear 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% annual top-line growth in FY2024 is more or less in line with consensus Street estimates included in the report. However, monday.com expects its free cash flow margins to decline from ~28% in FY2023 to ~22% in FY2024 as the company plans to more aggressively reinvest in the Work OS platform [hurting the operating leverage story].
Considering monday.com’s relatively small market share (~1%) compared to its $100 billion total addressable market or TAM, I wholeheartedly support management’s decision to increase R&D spending aimed at driving long-term growth. As of the fourth quarter, monday.com’s cash position stood at $1.16 billion, and the company has little to no debt, meaning monday.com BALANCE it is in good shape and I see no liquidity problems for the foreseeable future.
That said, monday.com’s growth rates are still in deceleration mode and sales cycles have not contracted amid persistent macro headwinds. Therefore, today’s selling pressure on MNDY stock is not necessarily unwarranted. As a long-term investor, I continue to see monday.com’s expanding platform, decreasing customer acquisition costs, and healthy retention rates as reasons enough to consider an investment in MNDY stock. However, let’s reassess monday.com’s long-term risk/reward in light of its Q4 2023 report to see if MNDY stock is worth buying here.
Fair value and expected return of MNDY
Amid continued macroeconomic uncertainty, the expansion of the monday.com platform continues to look very promising as organizations (small and large) are looking for bundled offerings to save costs (consolidation).
Despite facing macro and geopolitical headwinds, monday.com continues to grow like a weed. While monday.com is not yet profitable on a GAAP basis (getting close after all), it has turned operationally profitable on a non-GAAP basis, and I see an FCF monster in the making. Having a cash cushion of ~$1.16 billion and little to no financial debt should allow management to remain aggressive during the coming downturn in their quest for more market share.
To implement a margin of safety and account for monday.com’s increased scale, I have reduced my expected 5-year sales CAGR growth assumption from 30% to 25% in our valuation model. Furthermore, monday.com has now proven its FCF generating capability and the business is operating close to profitability. Therefore, I am lowering the required IRR (discount rate) from 20% to 15%. All other model assumptions are unchanged and relatively straightforward. If you have any questions, please feel free to share them in the comments.
Here is my updated rating model for monday.com:
While MNDY essentially trades at our updated fair value estimate of $204 in early market hours, the long-term risk/reward doesn’t look that favorable with MNDY’s expected 5-year CAGR of 9.65% falling much less than our investment hurdle rate of 15%. Henceforth, I am downgrading monday.com to a “Hold” rating.
Over the past year or so, I’ve issued two Buy ratings on MNDY stock, once in the low $100s in December 2022 and then in the mid-$100s in May 2023:
In my opinion, monday.com is a fantastic business that will continue to grow at a strong clip for several years to come. While the shares of monday.com Ltd. aren’t overvalued like many of its large-tech/mega-cap peers, the long-term risk/reward doesn’t make sense for new equity allocations 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 will not buy more until and unless MNDY stock experiences a significant price or timing correction. If the stock continues to rise (risk/reward deteriorates significantly) in the coming weeks and months, we will short according to our portfolio rules.
Main takeaway: I rate shares of monday.com ltd. “Hold/Neutral/Avoid” at current levels.
Thanks for reading and happy investing. Please share your thoughts, questions or concerns in the comments section below.