Monday.com (MNDY, Financial) recently announced that it beat its fourth-quarter estimates, causing its stock to rally by more than 10%. The Israeli technology company posted a staggering 57% year-over-year revenue growth, raising the question of whether its stock could rebound from the severe downslide it incurred last year.
Considering the market's subdued volume, it is likely that many investors are playing a wait-and-see game on tech stocks. However, here are a few factors worth considering if you are interested in Monday.com and its cloud-based platform where users can create their own applications and project management software.
Monday.com's fourth-quarter earnings review
Fundamental variables suggest that Monday.com's most recent top-line surge is no fluke. Monday.com achieved 86% in year-over-year customer growth and a 76% increase in annual recurring revenue.
Furthermore, the company's adjusted free cash flow reached $29.7 million in its fourth quarter, accompanied by operating income of $14.3 million. Monday.com is still in the embryonic stage of its business cycle, meaning its robust financial results might come as a surprise to many. However, the company operates a lean business model with attributes such as cost leadership and product differentiation allowing it to scale exponentially.
Source: Monday.com
In addition to beating its ex-post earnings target, Monday.com revealed a positive outlook, stating that it anticipates its revenue to settle between $154 to $156 million in full fiscal 2023, which would amount to a 42% to 44% year-over-year increase if realized.
Lastly, the company's fourth-quarter Management Discussion and Analysis section conveyed a word of encouragement from the company's CEO, Eliran Glazer, who stated:
"Customers are turning to Monday.com to help them execute more strategically and efficiently, and we remain confident in the long-term opportunity ahead as we continue to provide solutions that are core to our customers' use cases... These strong results make us even more confident in reaching our targets in both the short and long-term, and we expect to again be free cash flow positive in FY'23."
Although Monday.com has not established itself as a profitable company, after reading through the earnings report, I believe the company could reach financial stardom in the coming years.
Operational prowess and key metrics
A critical feature of Monday.com's recent success is its horizontally integrated product line, which adds valuable synergies to its overall infrastructure. The company has scaled at every given opportunity since its inception, constantly reinvesting its operating cash flow into new features, suggesting that it possesses an "it is never enough" ethos.
Source: Monday.com
Furthermore, the company's successfully executed subscription-based model is a tremendous achievement. Although subscription-based revenue is desirable in the modern business environment, it remains difficult for entry-level technology companies to monetize a subscription-based model as the barriers to entry are significant. Additionally, Monday.com operates in a fragmented industry, meaning its subscriber growth is rather phenomenal.
As mentioned before, Monday.com has yet to consolidate a profitable income statement. However, various indicators suggest that the company's growth trajectory is promising. For instance, Monday.com's three-to-five-year annual revenue growth rate of 29.13% beats more than 91% of its sector peers. Moreover, its cash ratio of 2.95 implies that the enterprise possesses a liquid balance sheet, allowing it to reinvest with conviction and add to its existing asset base.
Risks worth considering
Although key indicators suggest that Monday.com is in excellent operating conditions, its dynamics do not necessarily hold a linear relationship to its stock's future performance. For example, investors' risk attribution could come into play during a trying economic period, which would see growth stocks such as Monday.com shed value regardless of their operating performance.
Fortunately, growth stocks and Monday.com have started the year brightly, indicating investors' desire to opt for risky assets. Whether growth stocks can sustain their year-to-date momentum throughout 2023 is anybody's guess. However, factors such as moderating inflation, China's pandemic reopening and an abated European recession could add substance to a sustainable bullish argument.
A second risk pertaining to Monday.com worth considering relates to the zeitgeist from guru investors. According to the latest 13F filings, a limited number of hedge funds are bullish on Monday.com's stock, with Catherine Wood (Trades, Portfolio) and Chase Coleman (Trades, Portfolio) reducing their exposure in recent months. Although guru trades should never be looked at in isolation when making investment decisions, it provides critical insight into what Wall Street's finest are investing in.
Final word
Monday.com's fourth-quarter earnings beat raised the eyebrows of many investors as the company's year-over-year revenue surged, illustrating that a trying macroeconomic environment provided little hindrance.
Furthermore, the company has set a positive outlook for its next fiscal year, claiming that its revenue could proliferate even further as its horizontally integrated business model continues to grow in popularity among corporate and individual users.
Although Monday.com has yet to consolidate a profitable income statement, its growth trajectory dominates its peers, and its balance sheet is robust. As such, I believe it is increasingly likely that Monday.com could deliver an abundance of residual value to its shareholders in due course.
