Brief Review of monday.com's Fourth Quarter 2023 Report
Earlier this morning, monday.com Ltd. (NASDAQ:MNDY) reported stronger-than-expected fourth-quarter 2023 numbers, with quarterly revenue growing 35% year-over-year to $202.6 million and platform company Work OS reporting a lower than expected GAAP operating loss of -$1.1 million [GAAP operating margin of -1% vs. -7% from a year ago period]. Although monday.com is not profitable on a GAAP basis, the the company reported 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 the fourth quarter of 2023.
Management commentary on the 4th quarter of 2023:
Digging a little deeper, I see that the strength of monday.com's results comes from its continued upscaling in the enterprise space, and in particular the growth of new enterprise customers. [$50K+ ARR customers grew 56% y/y in Q4]. Over the past few quarters, monday.com's net retention rates have declined, and this trend continued in the fourth quarter, with overall NRR coming in at 110%.
According to management's comments on the fourth quarter earnings call, the negative trend in monday.com's NRR is a direct result of temporary macroeconomic headwinds, and as such, this key metric is expected to start rising again over the course of of the second half of 2024 given the imminent changes in Monday.com prices.
Given that this is the first time in its history that monday.com has raised prices on its existing customer base, management expressed conservatism during the earnings call, which is also reflected in monday.com's guidance for the first quarter of 2024 and fiscal year 2024.
Given MNDY's year-to-date earnings surge, I can see why this conservative guide may upset MNDY shareholders, who appear to be selling the stock during today's trading as MNDY was down double digits at the time of writing.
Now, monday.com's financial outlook for 27-28% year-over-year revenue growth for fiscal 2024 is more or less in line with consensus estimates in the report. However, monday.com expects its free cash flow margins to fall from around 28% in fiscal 2023 to around 22% in fiscal 2024, as the company expects to reinvest more aggressively in the Work OS platform. [hurting the operating leverage story].
Given 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. In the fourth quarter, monday.com's cash flow was $1.16 billion and the company had little to no debt, meaning monday.com's balance sheet is in very good shape and I don't see any problems liquidity for the foreseeable future.
That said, monday.com's growth rates are still in deceleration mode and sales cycles have not diminished amid persistent macroeconomic headwinds. Therefore, the current selling pressure on MNDY stock is not necessarily unwarranted. As a long-term investor, I continue to view the expansion of the monday.com platform, lower customer acquisition costs, and healthy retention rates as many reasons to consider an investment in stocks MNDY. However, let's re-evaluate 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) seek bundles to save on costs (consolidation).
Despite macro and geopolitical headwinds, monday.com continues to grow like a weed. Although monday.com is still not profitable on a GAAP basis (near break-even), it has become operationally profitable on a non-GAAP basis, and I see an FCF monster in the making. Having a cash cushion of approximately $1.16 billion and little to no financial debt should allow management to remain aggressive during the impending downturn in its quest for greater market share.
To implement a margin of safety and account for the increased size of monday.com, I reduced my expected 5-year sales CAGR growth assumption from 30% to 25% in our valuation model. Additionally, monday.com has now proven its ability to generate FCF and the company is operating close to break-even. Therefore, I reduce the required IRR (discount rate) from 20% to 15%. All other assumptions of the model are unchanged and relatively simple. If you have any questions, feel free to share them in the comments.
Here is my updated valuation model for monday.com:
While MNDY is essentially trading at our updated fair value estimate of $204 in the pre-market hours, the long-term risk/reward does not appear very favorable, with MNDY's expected 5-year CAGR of 9.65% being well below our investment. minimum rate of return of 15%. From now on, I am downgrading monday.com to a “Hold” rating.
Over the last year or so, I've issued two “Buy” ratings on MNDY stock, once in the low $100 range in December 2022 and then in the mid-$100s in May 2023:
In my opinion, monday.com is a fantastic company that will continue to grow at a strong rate for several years to come. Although the action of monday.com Ltd. isn't overvalued like many of its large- and mega-cap tech peers, the long-term risk/reward doesn't make sense for a new capital allocation at this price. At TQI, we hold an approximately 1.8% position in MNDY as part of our Moonshot Growth strategy, with a cost basis of $111.70 per share. For now, we will continue to hold this winner, but we will not buy more until MNDY stock experiences a significant correction in price or time. If the stock continues to advance (the risk/reward ratio worsens significantly) in the coming weeks and months, we will make reductions in accordance with our portfolio rules.
To remember : I rate the stock of monday.com Ltd. “Keep/Neutral/Avoid” at current levels.
Thanks for reading and happy investing. Please share your thoughts, questions, or concerns in the comments section below.