monday.com: A Great SaaS Stock To Buy (NASDAQ:MNDY)

Thesis

The collaborative work management (CWM) market is heating up, as more organizations look for ways to enhance their work productivity, teamwork, and adaptability in response to evolving business demands and digital transformation. monday.com (NASDAQ:MNDY) is unique in this market as it is the fastest-growing CWM stock in its category. In its Q3 2023 earnings, the company reported a revenue of $189.2M, up 38% year-over-year, which is nearly twice as much as its peers, Asana (ASAN), Atlassian (TEAM), and Smartsheet (GREASE) (see below).

What makes monday.com to grow at double the speed of its competitors? In this article, we will examine the key factors that fuel monday.com’s growth and analyze its business strategy, its product features, its go-to-market approach, and its financials. We will also give a fair value estimate for the stock, which will help investors make an informed decision about the company.

CWM Market: Large and Growing TAM

monday.com operates in the CWM market, which spans various software categories within the larger SaaS market. CWM software helps teams collaborate, communicate, and coordinate their work across different projects, workflows, and tasks. According to monday.com, the CWM market was worth $101 billion in 2023 and is expected to grow at a CAGR of 14% to reach $150 billion by 2026.

The CWM market is big and largely untapped, as all the CWM vendors are growing much faster than the overall 14% market growth. The dominant CWM vendors have only reached a fraction of the TAM, which suggests that there is a big opportunity for companies like monday.com to grow their customer base and increase their market share.

Rapid Product Innovation Strategy Drives Account Growth

monday.com’s core product is its Work OS platform, which allows the company to quickly design and release new applications to its users. Also, users can create and customize their own applications and workflows using a no-code or low-code approach. The platform is highly adaptable and scalable, supporting hundreds of use cases and integrating with many third-party applications.

The company’s product strategy is rapid innovation, which involves launching many new products every quarter, such as monday CRM, monday AI, monday Service, and monday Dev. These products are built on top of the Work OS platform and target specific areas of the CWM software market, such as customer relationship management (CRM), IT service management (ITSM), and software development.

We believe that this fast-paced, multi-apps release strategy increases the value proposition and stickiness of monday.com’s platform, as well as helps to attract new customers and expand within existing customers. The strategy is paying off, as evidenced by its strong customer adoption to its newly released products. Total monday sales CRM accounts grew 32% and monday dev accounts grew 33% from the prior quarter (see below).

Globally Established Sales and Partner Network

monday.com has a worldwide presence, with customers in over 100 countries. The company has been expanding its international footprint, by opening new offices in strategic locations, such as Chicago, London, Tokyo, and Sao Paulo, and by partnering with more than 200 local channel partners to scale and diversify its customer base. These partners together with the monday.com sales teams are helping the company to reach new customers, and deliver customized solutions, while also providing them with ongoing support and guidance.

We think that the global partner network is a key capability for the company, as it enables to expand its business across different regions. This is an advantage that many CWM vendors lack, as they do not have such a widespread sales network as monday.com does. This also ensures that the revenue is geographically diversified and resilient to local/regional economic fluctuations. The company’s revenue distribution by geography is fairly balanced and has no significant concentrations (see below).

Segment-Specific Sales Strategy

Another key advantage of monday.com is its segment-specific sales strategy that caters to different customer sizes and needs, from small and medium-sized businesses (SMBs) to midmarket and enterprise customers. The company uses a combination of self-service, inbound, and outbound sales motions, depending on the customer segment.

For SMBs, monday.com primarily relies on its self-service and inbound sales motions, which leverage its online presence, word-of-mouth referrals, and free trial offers to attract and convert customers.

For midmarket and enterprise customers, monday.com mainly uses its outbound sales motion, which involves proactive engagement by its sales representatives and partners. In the enterprise, they use the land and expand strategy that aims to penetrate the customer by starting with small teams and then expanding to more teams and departments over time. This strategy has resulted in significant growth in its enterprise customer base and revenue. The company’s number of customers with more than $50,000 in annual recurring revenue (ARR) increased by 57% year-over-year to 2,077 in the third quarter of 2023 (see below).

In conclusion, the segment-specific sales strategy allows the company to optimize its customer acquisition cost, annual contract value (ACV), and net retention rates (NRR). The NRR metrics below indicate that monday.com is able to acquire customers efficiently, retain them effectively, and expand them successfully.

Valuation

Despite its strong growth and solid financials, we think that monday.com is trading at a discount compared to its peers in the CWM market. Based on the closing price of $195 on January 19, 2024, the company has a market capitalization of $9.3 billion, and a forward EV/S ratio of 11.5. Its peers, Atlassian, Asana, and Smartsheet, have forward EV/S ratios of 14, 6, and 6, respectively (see below).

Our view is that monday.com deserves a higher valuation than its peers, given its superior growth rate. The company’s revenue growth is double that of its peers and should trade at least at a forward EV/S ratio of Atlassian, which implies a share price of $248. This represents a 25% upside from the current level.

We also think that CWM companies deserve a higher valuation than the overall SaaS market, because of their largely untapped and faster-growing TAM size.

Conclusion

monday.com is a growth leader in the CWM market, with a proven track record of delivering strong revenue growth, margin expansion, and cash flow generation. The company has a fast-paced innovative product strategy, a globally established sales and partner network, and a largely untapped market opportunity. We believe that the stock is undervalued compared to its peers and that it has 25% upside potential in the long term.

We rate monday.com as a buy, with a price target of $248.