monday.com: Positioned For Growth With $277 Price Target (MNDY)

monday.com (NASDAQ:MNDY) is a relatively new position in my portfolio. After updating my valuation following Investor Day in Dec-23 and the guidance provided in the February Q4-23 earnings call, I rate the stock a BUY with a $277/share 1Y price target (+29% 1Y upside).

At these levels, the company is a compelling investment due to the continued evolution of its Work OS platform and strong management execution on the profitability side, as well as the strong momentum seen in larger enterprise accounts.

Here are my quick thoughts on the Q4-23 earnings call and my updated valuation.

Key Takeaway

On the 12th of February, monday.com reported Q4-23 earnings that topped analysts’ estimates. FY23 revenue grew at 41% YoY, driven by strong customer adoption and expansion, especially in the larger enterprise accounts.

Things I liked:

• Revenue growth still remains strong, especially in the enterprise segment. Despite geopolitical uncertainty, revenue growth remained stellar in FY23, growing 41% YoY and reaching $729.7m. Going forward, the company is guiding for Q1-24 revenue growing at 28% – 30%, and FY24 revenue to be in the $926m – $932m range, representing 27% – 28% growth YoY. Total customers grew ~21% YoY in FY23, reaching approximately 225k. During the year, the company added 821 new customers with $50k+ ARR, an acceleration from 681 new customers in this cohort in the prior year, driven by the continued commitment in strengthening its enterprise-level solution. Customers with $50k+ ARR now represent 32% of ARR, up from 27% a year ago. Customers with $100k+ ARR represent 20% of ARR, up from 17% last year, again highlighting the fact that monday.com products are resonating well with enterprise customers.
• Improved efficiency and strong commitment to profitability. In addition to strong top-line growth, the company is seeing continued improvements in efficiency, reporting record non-GAAP operating margins and free cash flow. FY23 non-GAAP operating income came in at $61.6m (8% margin) vs a $47.1m operating loss in the prior year. For FY24, management is calling for non-GAAP operating income in the $58m – $64, range, equivalent to 6% – 7% margin. Free cash flow remains strong, with non-GAAP free cash flow of $204.9m in FY23 (28% margin) vs $8.1m in FY22 (2% margin). Management is calling for a slight slowdown in FCF as the company keeps reinvesting into the business, but cash flows are still expected to come in at a healthy 22% margin (or $203m at the midpoint) in FY24.
• Multiproduct strategy is working well, as the company keeps focusing on innovation and product development. Over the past year, monday.com introduced new capabilities and delivered new features such as monday AI and monday workflows. The company introduced mondayDB in FY23 and is now entering in Phase 2.0 of the development stage, focused on more complex use cases. Starting from last year, the company began opening Monday sales CRM to selected customers. Demand for CRM products remains strong (21% sales CRM customer growth in FY23) and monday expects general availability by end of Q1-24. General availability by end of Q1-24 is also expected for monday dev, a tool meant to simplify the software development process. Monday keeps seeing a large amount of cross-selling between products and this trend continued in Q4-23 and into Q1-24. Management expects cross-selling to be substantial in the future, and this is likely coming along with a revamp of the sales organization. Currently, monday has one team doing the sales process, but management hinted at the possibility of having more reps specialized in selling different products.

Things I’m watching:

• Decreasing net dollar retention (NDR). Net dollar retention rates dropped to 110% in Q4-23, due to continued macro headwinds, vs 121% a year ago. However, management is expecting NDR to begin to recover in the second half of FY24. NDR is still higher for larger enterprise customers (115% for $50k+ ARR cohort and 114% for $100k+ ARR cohort), which is a positive sign as the company is moving upmarket.
• Prices increase. After months of testing, the company rolled out a price increase across its product suite, and management is expecting this price adjustment to contribute to $15m – $20m to FY24 revenue. The price increase was originally planned for Jun-24/H2-24, but the company completed its A/B testing earlier than expected. So far, management is not seeing material impact on ARR and very minimal changes to customer churn and seat expansion (and this is happening mainly on smaller accounts). However, this is the first time monday is implementing a price increase affecting its existing customer base, so I will keep tracking any material changes in customer churn and the potential impact on NDR in the short-term.
• FY24 revenue guidance was in line with analysts’ expectations, and management is calling for a drop in FCF margins. Revenue guidance of 27% growth was in line with analysts’ expectations, but the number is benefitting from increased short-term revenue from the price increase. Taking the impact of price increase out, true revenue growth would be closer to 25% YoY, which is at the bottom-end of the base-case management laid out during Investor Day. Free cash flow margins are also expected to contract YoY: while management is calling for Q1-24 FCF margins of 27% – 29%, FY24 margins are expected to be ~22% (vs 28% FY23). Management is attributing the discrepancy between Q1-24 and FY24 margins to cash bonuses the company usually pays its quota-carrying reps in Q2 and Q4.

Guidance and Impact on Valuation

Here is how management guidance/long-term targets are factored in the valuation:

• Revenue Growth: The company is guiding for 27.3% Revenue growth in FY24, or $929m at the midpoint. During its Investor Day in Dec-23, management laid out a base case of high 20%s – low 30%s revenue growth mid-term (FY24-FY26). I’m expecting revenue growth of 26% – 27% through FY28, in line with what the company laid out on Investor Day. After a period of higher growth in the high 20%s in FY24-FY26, I’m expecting revenue growth to slow down to 26.3% in FY27 and 26.0% in FY28.
• Free Cash Flow: During Q4-23 earnings, the company updated its FY24 FCF guidance to $203m Non-GAAP FCF at the midpoint (or ~22% margin), while on Investor Day, the company called for a medium-term base-case scenario of mid 20%s FCF margins. Management is calling for ~$1bn FCF generated between FY23-FY26. I expect FY24 Non-GAAP FCF margin of ~22%, in line with guidance provided in Q4-23. Margins are expected to stabilize around 25% in FY28, in line with management calling for mid-20%s margins mid-term. My estimates for FCF are also in line with management calling for ~$1bn cumulative FCF generated between FY23-FY26.
• Share dilution: The company is not explicitly forecasting share count. However, during Investor Day, management called for SBC as a % of Revenue in the low to mid-teens. I’m modelling share dilution of 5.0% in FY24, equivalent to 50.8m basic shares outstanding and 53.6m fully diluted shares outstanding.

Valuation

My current valuation implies a fair value of $238/share, equivalent to a $277/share 1Y price target (29% upside from current levels), driven by sustained top line growth and FCF generation. I rate the stock a BUY.

Below is the valuation summary:

Under these assumptions, I’m expecting a 5Y revenue CAGR of ~27% and long-term FCF margins of 25%. This would mean monday.com will generate ~$594m in FCF by FY28 on ~$2.4bn of revenue.

Here is what future FCFs would look like under these assumptions:

I expect Adj. FCF/share to grow from $4.24 LTM Dec-23 to $19.85 in 10 years-time, ~17% CAGR (Note: Adj. FCF/share is calculated on a fully diluted shares basis).

Here is what 1Y price target sensitivities look like:

My base-case $277/share 1Y price target falls at the high-end of the range of recent Wall Street’s estimates (the most recent price target update is from JPMorgan 13 days ago, calling for a $270/share price target):

Regarding some of the recent analysts’ changes, Bank of America initiated coverage on 26^th of February with a BUY rating and a $280/share price target, citing the company’s potential to surpass consensus estimates, continue gaining market share, offer value at its current price compared to peers, leverage expansion into the enterprise market and launch new products to drive long-term growth. BofA sees monday.com as a rule of 55 company by FY24; for reference, in my estimates monday.com will grow top line at 27.3% and achieve FCF margins of 22.0% in FY24 (rule of 49).

JPMorgan raised its price target from $230 to $270/share, maintaining an OVERWEIGHT rating. The decision to increase PT reflects JPMorgan’s conviction on monday.com demand trends. After conversations with company leaders, JPMorgan’s analyst Pinjalim Bora believes the company has shown strong execution and this would potentially drive a superior growth plus margin profile.

On the 4^th of March, Tigress Financial Partners raised their price target from $240 to $280/share, while maintaining a BUY rating on the stock. The firm cited monday.com’s continued evolution of its Work OS platform, which is enhancing enterprise management capabilities and driving customer adoption.

However, some Wall Street firms are more cautious. DA Davidson downgraded monday.com to a NEUTRAL rating and a $190/share price target in December 2023, and reiterated its recommendation and price target in February 2024.