Description

In full transparency, originally submitted Monday.com as a short idea for membership application this summer before 2023 Q2 earnings, based upon thesis that while fundamental business quality is relatively healthy, the stock was simply far too expensive against the contracting growth trajectory, likely setup to rerate downwards in the near-term. The stock is now off 30%+ since then from 52-week high of $189.15, recent customer calls + channel checks affirm improving competitive positioning, and early results for Microsoft Copilot suggest high demand for automation capabilities layered across horizontal productivity products. At this valuation level, MNDY now looks attractive with a much lighter GARP story for a 20%+ IRR returns profile on a 3Y horizon. Looking forward to any feedback/discussion, thanks.

Monday.com (NASDAQ: MNDY)

Founded in 2012 in the last wave of SaaS workflow startups, Monday.com is an all-in-one workplace productivity + collaboration bundle complete with spreadsheets, task management, chat/email, and notes/documents that can be packaged into various systems of record (eg, CRM) and workflows (eg, developer sprint planning). $703M run-rate revenue ($176M 2023 Q2), growing 42% YoY at 89% gross margin, 26.5% FCF margin. 200K+ customers in 14 languages (54% NA, 25% Europe, 21% RoW), including 59% of Fortune 500 and 1,892 $50K+ ARR logos. MNDY currently trades at $127.64 per share and $6.4B fully-diluted EV (6.7x NTM consensus revenue, 30% YoY, 7.5x NTM consensus gross profit, 42.3x NTM consensus FCF, 67% of 52W high), a premium against nearest public competitors Asana (5.4x NTM revenue, 12% YoY, 6.0x NTM gross profit, negative FCF) and Smartsheet (4.6x NTM revenue, 20% YoY, 5.6x NTM gross profit, 35.7x NTM FCF, 13% FCF margin) justified by both higher growth rate and FCF margin profile.

Summary Historical Financials

Investment Thesis

Recent Recovery from Collapsing Growth Trajectory Due to Macro Pressure: Inflecting unique visitor traffic trends demonstrate recovery from prior demand softness creating growth pressure in 2023 H1, consistent with management commentary that net new demand remains healthy. The 2023 Q2 print demonstrates a turn around from four sequential quarters of weakening net new dollars per quarter, dropping from height of $15.2M down to $12.3M, reflecting weakening go-to-market performance before the trend reversed in 2023 Q3. Management commentary in September also claims to be largely out of the woods on net retention pressure contracting 15 points in the last year to 110% in 2023 Q2, affirming guidance for “slightly below 110%” in 2023. While calling quarters isn’t my cup of tea, this triangulation suggests trends are tracking to beat guidance ($181-183M revenue) for the ninth quarter in a row, likely providing stock price support below what’s been a falling dagger over the last few months.

Historical Unique Traffic Growth (YoY)

Compounding Competitive Advantage in a Copy-Cat Category: The long-term arc of software history in productivity + collaboration products reveals an unavoidable cycle towards bundling: 1) startup invents new form factor that starts to see real adoption, 2) startup competitors emerge, often fighting tooth-and-nail for eyeballs via uneconomic customer acquisition, 3) the leading bundles eventually incorporate the new form factor into their suite of products. In the past decade, we’ve seen this cycle play out with chat (ie, Slack), relational spreadsheets (ie, Airtable), task management (ie, Asana), digital whiteboards (ie, Miro), collaborative documents (ie, Notion), etc. Given the pressure to expand product surface area to both capture more dollars and increase user reliance, profit pools of new point solutions in a copy-cat category eventually wither until incorporated into bundles that can scale with increasing efficiency and adoption gravity within customers. For instance, the Slack story demonstrates that even powerful network effects can eventually succumb to the distribution advantage of the Microsoft Teams bundle. With an aggressive pace of shipping, even copying competitor features, Monday.com has emerged over the last decade as the most complete productivity + collaboration bundle at scale after the Microsoft 365 bundle and Google Workplace suite. Not only does the bundling strategy make it easier to drive adoption on shipping incremental product versus stand-alone point solutions, but such a broad product of generic collaborative form factors + recent progress rolling out function-specific modules that drive up price per seat (ie, CRM priced at $24 pro seat versus $16 standard, developer collaboration app priced at $16) creates a broad product surface area to orchestrate enterprise workflows across every department, up and down the seniority ranks from ICs conducting the majority of their work inside Monday.com all the way up to executive dashboarding and enterprise-wide communication. Such dependence upon Monday.com as the source of truth for enterprise workflow data and the collaboration engine for processes across departments makes it extremely sticky. Unlike some software products that are relatively painless to rip-and-replace, Monday.com gets increasingly entrenched with growing adoption within their customers due to prohibitively high switching costs around 1) transitioning data out of Monday.com into a new product with its own data schema, which often requires high-budget consulting teams to execute, 2), rebuilding all of the processes in Monday.com from scratch in any replacement product, requiring an org-wide rebuilding distraction given adoption across departments, 3) time-intensive change management involved in procuring, implementing, and training an entire employee base on a new alternative product. In short, Monday.com maintains a strong competitive position as one of the few productivity + collaboration bundles at scale, growing increasingly compelling to new customers who’ve not adopted yet and increasingly sticky within the current customer base. This shows up empirically in net retention behavior holding up at 110%+ despite macro pressure on slowing enterprise headcount growth constraining a seat-based business model, which compares to Asana at 105%+ net retention in 2023 Q2.

Historical Net Retention Performance

Ahead of Competitors on Upside Story Around “AI”: The biggest growth upside story management emphasizes is overlaying “Generative AI” features on top of the current product capabilities. What this actually amounts to is embedding off-the-shelf foundation models such as GPT-4 from OpenAI to power lightweight automations across the Monday.com suite: content summarization on a set of files, auto-generated email composition, recommended tasks lists based on a goal, natural language to syntax formula builder, etc. Monday.com launched their first batch of automation features in April 2023, well ahead of Smartsheet not announcing similar capabilities until 2023 Q3. Management believes these new capabilities will support price increases: “I don't think AI is going to be embedded in the platform without like… on the same seat cost. It has so much value, customers will be happy to pay more for it. So I think conceptually, like pricing and revenue wise, I think it will increase.” Given uncertainty around how much pricing power these automation capabilities will drive versus becoming embedded as must-haves  across the entire space, it’s hard to give much credit to this product cycle moving the needle on ARPU. Given the AI capabilities are nascent in beta, TBD on price equilibrium once launched broadly. However, given comparable Microsoft Copilot product announced at $30 per user per month with similar capabilities across Excel, Word, PowerPoint, etc (as much as a roughly 2x price increase per seat), imagine there is ample opportunity to position as an affordable alternative in an environment in which CFOs are already tightening the purse strings.

Downside Risks

Geopolitical Risk From Regional Conflict: Given significant stock underperformance of MNDY relative to both ASAN and SMAR over the last month, one unavoidably obvious factor at play is regional conflict in the Middle East given Monday.com is headquartered in Tel Aviv. While of course there is a non-trivial risk of significant escalation that would generate further disruption to commercial activity in the region, LinkedIn data suggests that the vast majority of customer-facing roles reside in the US, especially in the sales org that likely impacts performance most immediately. Imagine management will address during 2023 Q3 earnings call on November 13, 2023.

Potential Capability Bottleneck Controlled by Microsoft: Monday.com relies on Azure OpenAI Service to power their new “AI” capabilities, which thus far appears to be sufficient to produce similar capabilities of exactly what Microsoft has signaled launching. As of 2023 Q3, Microsoft Copilot is already in beta with 10k users, including 40 of the Fortune 100. Certainly possible that Microsoft determines to give themselves a head start on incorporating new foundation models with higher performance into their own Copilot prior to releasing similar capabilities to the public via Azure OpenAI Service, which could create a temporary performance advantage on some of the same new use cases Monday.com pitches to customers. Unlikely, and unclear what the actual impact would be, but possible.

Emerging Innovation Leapfrogging Monday.com: While Monday.com is managing to stay close to the frontier on new AI capabilities emerging in productivity + collaboration across both public and private competitors, worth acknowledging that historical cycles in software allowed leapfrogging when new technologies unlocked a sufficiently big technological advance (eg, on-prem to cloud). This time around, ChatGPT Enterprise from OpenAI already supports analytic operations on PDFs and uploads of various structured data formats. If these capabilities turn out to be sufficiently more powerful than what’s available in Monday.com, can imagine OpenAI stealing user mindshare away, especially if the ChatGPT plug-ins capabilities that haven’t made much of a splash so far turn out to support process orchestration that otherwise occurs in Monday.com. Again, extremely early days on these product speculations so hard to calibrate the risk, but crucial to watch closely as this plays out.

Valuation Analysis

While the investment thesis above supports Monday.com as a relatively high-quality, sticky software business, again, the idea started as a short a few months ago when the stock was 48% higher than today… all comes down to price you pay for the value you get. Illustrative forecast below demonstrates a relatively light case required to reach 20%+ IRR profile: flat net new dollars assuming no incremental go-to-market capacity generated (rather extreme assumption in software around $0 new new dollars as if the sales org flatlines), terminal gross margins at 89% as in last two quarters, and reaching FCF margins of 30% relative to 26.5% in 2023 Q2. Anchoring valuation on 30x NTM FCF three years out gets to $233.58 share price for 83% upside (21% IRR), arguably a light multiple relative to where comps trade at similar business quality + 2026E scale + FCF profile.

Illustrative Forecast

Public Comparables (Enterprise Applications)

Catalyst

2023 Q3 Earnings: Monday.com reports on November 13, 2023, during which another quarter of reversing the contracting net new dollar growth per quarter would add another datapoint to that inflection trend enduring, and management commentary addressing the regional conflict may resolve uncertainty around the recent overhang on the stock.