Shares of project management software company Monday.com (NASDAQ:MNDY) rose by more than 10% on Monday, November 13th. Now up more than 38% year-to-date, the stock has emerged as a rare positive growth story amid the inflation, higher interest rates and generally challenging market conditions of 2023.
What is the software applications developer doing so well to thrive when so many other growth stocks are struggling to make headway?
Why Did Monday.com Stock Go Up?
Monday.com share price went up by approximately 10% recently on the back and unexpectedly positive Q3 earnings report.
The company reported year-over-year revenue growth of 38% with quarterly revenues of $189.2 million.
Monday.com also turned an unexpected profit on a GAAP basis, with earnings reaching $0.15 per share.
Beyond its financial performance, the CRM developer also performed quite well in terms of key business initiatives in Q3. The number of customers contributing $50,000 or more in annual recurring revenues increased 57% year-over-year.
The company also remains ahead of schedule in rolling out its new mondayDB platform, a data architecture that promises faster querying capabilities for large datasets and the ability to quickly derive insights from large, disparate pools of data.
In addition to very solid Q3 performance, Monday.com also raised its outlook for the coming quarter to $196-198 million, representing 31-32% growth on a year-over-year basis. For the full year, management expects revenue growth of roughly 40%.
In most regards, the Q3 earnings report significantly outperformed analyst estimates, causing the stock to move higher. Analysts had expected just $182.4 million in revenue and adjusted EPS of $0.21.
Adjusted EPS for the quarter hit $0.64, and the company achieved profitability on a GAAP basis for the first time since Q4 of 2021.
With a turn toward profitability and much better than expected revenue growth in the most recent quarter, Monday.com has become a potential bright spot for growth investors. This is especially true in light of the macroeconomic headwinds of the current market, which make the company’s Q3 results all the more impressive.
The positive outlook for Q4 and the full year also contributed to the jump in share prices, as investors now expect strong growth to continue.
How High Will Monday.com Stock Go?
Even after the recent price spike, analysts are still fairly bullish on MNDY shares. The stock’s median target price, based on 15 analysts’ forecasts, is currently $195 per share, 16% above the most recent price of $168.11.
Even the lowest price forecast implies a 7% increase to $180. The stock also maintains a nearly unanimous Buy rating from analysts, with 14 of the 16 analysts covering the stock rating it as such and the remaining two assigning Hold ratings.
Despite this bullishness from Wall Street, it’s worth noting that Monday.com still trades at a considerable premium from a value perspective. At more than 180 times forward earnings and nearly 11 times sales, the market is pricing in a huge amount of growth from Monday.com.
Given that the company has reached only very narrow profitability on a GAAP basis, this sky high valuation could prove risky for investors if the company fails to maintain its current revenue growth trajectory.
Rivals and Geography Threaten Growth
One of the most pressing risk factors for Monday.com is the competitive nature of the project management and workflow software market. Other software platforms, such as Microsoft Project and Adobe Workfront, are vying for the same customers as Monday.com.
With many companies facing budget constraints, there may be a limited pool of new businesses looking to change or upgrade their project management software solutions.
As an Israeli company, Monday.com may also experience business disruptions as a result of the ongoing conflict in Gaza.
Although the recent earnings report somewhat quelled investors’ concerns on this topic, the coming quarter’s report may more accurately reflect the conflict’s effects on the company. Israel’s economy is expected to contract by about 5% in Q4, potentially spelling trouble for companies based in the country.
Is MNDY a Buy?
Considering its outstanding revenue growth and the beginning of GAAP profitability in what is undeniably a difficult macro climate, Monday.com offers a potentially appealing growth proposition.
Assuming it can maintain positive margins and continue raising revenues, it could eventually justify its premium multiples.
Another positive aspect of Monday.com is the company’s robust balance sheet. With no long-term debt and a reserve of cash and cash equivalents totaling $1.05 billion, the company is in an excellent position to continue investing in research, development and marketing initiatives.
This lack of debt is especially beneficial at a time when interest rates show no signs of falling and the costs of borrowing remain elevated.
A final plus for Monday.com shareholders is the fact that institutional investors have taken a substantial ownership stake in the company. Institutions currently own more than 80% of Monday.com, indicating a strongly positive view for the company’s future on Wall Street.
On the downside, Monday.com’s high valuation and combination of competitive and geopolitical risks could mfake for rocky near-term performance.
Less positive earnings reports could cause the stock to shift lower, even if the company’s long-term prospects remain appealing. Improved market conditions, continued customer growth and a cessation of the Gaza conflict could all help to shore up the company’s risk profile, but these developments are likely to take time to come about.
Overall, Monday.com may be attractive to risk-tolerant growth investors with a long investment horizon and the willingness to ride out periods of volatility.
Although the stock has promise, it may be some time before its earnings catch up to its current valuation. If management can continue to execute the company’s growth strategy as well as it has recently, however, Monday.com could produce solid returns for investors over the next several years.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.