Growth stocks can be a wild ride. The long-term positive effect is usually accompanied by stomach-churning volatility. monday.com (NASDAQ: MNDY) currently has ups and downs. As of this writing, shares are down about 28% from their highs.
The company’s software-as-a-service business model is disrupting the way employees collaborate in the workplace, and additional enablers such as product expansion and artificial intelligence (AI) could drive long-term growth that can deliver outsized returns. The company is performing at a high level, making this recent decline a buying opportunity.
Here’s what you need to know.
Monday.com’s main business is cloud-based collaboration software. It’s a low-code, highly customizable platform where people can organize tasks, share information, and integrate automation and apps to improve workplace efficiency. Today, more than 225,000 customers use the product in 200 countries.
The company’s growth model is brilliant. It’s free for the first two people in an organization, making it easy for any business to try. If they like it, the software spreads through the company and moves up the price ladder as more people use it. This sales process has delivered a solid net revenue retention of 111%, highlighting how customers are spending more over time.
Monday.com’s long-term advantage depends on how it builds on its core project and task management software to penetrate adjacent markets. Since 2022, the company has launched several new products, including a Customer Relationship Manager (CRM) for sales, Dev for product and development teams, and Service for IT and support. Monday.com has integrated several AI tools and features to improve its products, leading to better user experiences and more loyal customers.
Today, Monday.com generates $906 million in annual revenue and grew more than 32% year over year in the third quarter. How high Monday.com’s ceiling is remains to be seen, but the product roadmap indicates that the company plans to become a jack-of-all-trades for enterprise software. Some of the world’s largest technology companies, such as Adobe And Salesforcetrading in business software.
If Monday.com consistently converts businesses into paying users and moves them up the pricing ladder, it will have a long growth trajectory.
Competition in the business software space is fierce, with so many players that it can be difficult to find the best of the bunch. Investors can use the rule of 40 to identify which companies are performing at a high level. The Rule of 40 is a simple metric that measures a company’s ability to grow without sacrificing profitability. Add a company’s sales growth to its free cash flow margin to calculate the Rule of 40 score.
Anything 40 or higher is typically considered a strong score:
As you can see above, Monday.com’s third quarter revenue grew 32.8% year over year, while 32.6% of revenue was converted into cash flow. That’s a Rule of 40 score of just over 65, easily surpassing the standard benchmark. In other words, Monday.com’s growth and pricing power are reflected in its financials.
If we value Monday.com based on its enterprise value compared to turnover, the share is well below the value it fetched from the stock market Everything in the stock market in 2020 to 2021:
Its valuation stands out (in a good way) compared to some of Wall Street’s other top tech stocks, such as CrowdStrike Holdings And Palantir Technologies. CrowdStrike’s enterprise value to revenue ratio is nearly double that of Monday.com, but scored a lower Rule of 40 (51) in the third quarter. Palantir’s line of 40 in the third quarter was a whopping 87, but its valuation is also off the charts at an enterprise value-to-revenue ratio of 64.
I’d say Monday.com has better financial performance than most stocks today, but its valuation is very reasonable compared to where other top tech stocks trade. If the company can continue its current trajectory, Monday.com has a good chance of achieving market-beating long-term investment results. If that happens, the stock probably won’t stay this cheap forever.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
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Nvidia: If you had invested $1,000 when we doubled in 2009, you would have $363,593!*
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Apple: If you had invested $1,000 when we doubled in 2008, you would have $48,899!*
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Netflix: If you had invested $1,000 when we doubled in 2004, you would have $502,684!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns December 23, 2024
Justin Pope has positions in Monday.com. The Motley Fool holds positions in and recommends Adobe, CrowdStrike, Monday.com, Palantir Technologies and Salesforce. The Motley Fool has a disclosure policy.
This Superstar AI stock is down 28% from its peak. Is it time to buy? was originally published by The Motley Fool
