Monday.com Stock Shakes Up The Market: How An Underdog Is Taking On The SaaS Giants!
The Israeli SaaS stock in my portfolio jumped a whopping +30% after the quarterly results were announced. Here's the background.
It is always dangerous to have a "favorite stock" in your portfolio. Because such emotions cloud an investor's view of a company. But what the management team at monday.com has delivered quarter after quarter since its IPO in June 2021 is first-rate and simply gratifying.
Especially when you consider that the company had to be run from Tel Aviv for 15 months in the middle of the war in Israel and Gaza. But the adverse external circumstances could not harm the SaaS company. That's why I'm particularly pleased with today's update on the MNDY 0.00%↑ stock. But maybe it's also because of the +30% price reaction after the latest Q4 2024 numbers. 😉
Either way, it is time to review the stock again and answer the question of whether the rapid share price increase means that now is a good time to take profits on Monday stock.
I've been watching the company since its IPO, buying my first position in November 2022 when it was trading below $100. Since then, Monday has become a core holding in my portfolio.
For those unfamiliar with Monday, I recommend my investment story from 2023 as an introduction:
monday.com on the Rise: Investing Opportunity Despite War?
Today, Monday is not quite as undervalued as it was at the time of this article, as the company's stock has tripled in value over the past two years.
But we'll get to the actual valuation later; first, a quick business update:
monday.com's Q4 2024 Financial Results
Here is a summary of monday.com's fourth quarter and full year 2024 financial results:
Q4 2024:
Revenue was $268 million, up 32% year over year.
Non-GAAP operating income was $40 million compared to $21 million in Q4 2023; non-GAAP operating margin was 15% compared to 10% in Q4 2023.
Free cash flow was $73 million.
The company is also profitable on a GAAP basis. Q4 earnings per share of $0.43 were well above analyst estimates.
Full Year 2024:
Revenue was $972 million, up 33% year-over-year.
Non-GAAP operating income was $132 million compared to $62 million in fiscal 2023; non-GAAP operating margin was 14% compared to 8% in fiscal 2023.
Free cash flow amounted to $296 million.
With net income of $32 million, Monday achieved its first profit in fiscal 2024. Profits are expected to multiply in the coming years.
This means that by the end of 2024, Monday reached an annualized run rate of over $1 billion. This represents a fivefold increase in revenue in just 4 years.
Most impressively, this tremendous growth has been achieved while making very responsible investments in sales and marketing, and while focusing on increasing profitability.
The free cash flow margin is already 30% in 2024, resulting in a Rule-of-40 score of over 60% (explained here in simple terms), which demonstrates Monday's extremely efficient growth.
Monday's Guidance For 2025
In February, Monday's management issued an extremely cautious initial guidance for 2025, forecasting a maximum of 26% revenue growth.
I expect this guidance to be extremely conservative, as it has been in previous years. I am very optimistic that Monday shareholders can look forward to three quarters of Beat + Raise. Revenue growth of approximately 30% to nearly $1.3 billion should be achieved by the end of 2025.
According to management's initial guidance, non-GAAP operating margin should reach 12% in 2025 and full-year free cash flow margin should reach 25%, resulting in full-year free cash flow of just over $300 million.
I would be a bit disappointed if this is the case and would expect much better profitability numbers. This guidance simply does not fit with the 2024 investment push (35% headcount increase) combined with the high operating leverage in the business model with a gross margin approaching 90%.
The Reason Behind The Success Story
Originally, the Monday software was designed to be a simple and flexible project management solution for small and medium sized businesses. Since then, the software has become scalable enough to be an alternative for larger companies. Of monday's 245,000 customers, over 1,200 companies pay the Israeli software company more than $100,000 annually.
This means that Monday is being taken more and more seriously as an enterprise software. It is competing with HubSpot and in the future probably even with top dog Salesforce. Monday's largest customer has licensed the software for 80,000 seats by 2024, a scalability that would have been unthinkable just a year or two ago. This is made possible by a major evolution of the underlying database layer called mondayDB.
Over the past two years, Monday has evolved from a project management one-trick pony to a true platform story. Based on its WorkOS platform and mondayDB, monday now offers four different horizontal core applications that address different segments of the enterprise application software market.
1. Monday Work Management
Work Management is monday's core business. It is the flexible project management solution that has made the company famous.
2. Monday CRM
In addition to the original work management, a separate CRM (Customer Relationship Management) was launched in 2023. The goal is to compete with typical mid-market solutions such as HubSpot CRM. The number of monday CRM customers more than doubled to nearly 28,000 in 2024.
3. Monday Dev
Development teams typically use solutions like Atlassian's Jira to manage complex software development projects. Monday now offers monday dev as an alternative for managing the various aspects of agile software development. The number of Monday dev customers grew 137% to more than 3,400 in 2024.
4. Monday Service
The service management solution is a brand new addition to the Monday product portfolio. It enables service and support organizations to manage their processes. After a beta program in 2024, Monday service became generally available in early 2025.
This makes monday even more an alternative to HubSpot, which also offers a services solution. Customers for the new service management product are typically existing Monday customers who already use Work Management or CRM and are now expanding their use of monday to include customer support.
The Competitive Situation Around Monday
When I first looked at Monday three years ago, Asana and Smartsheet were the two main publicly traded competitors. It is now clear that Monday has become the leader in the work management space.
Asana was neck-and-neck with Monday until 2023, but is now growing much slower and still unprofitable. Smartsheet was recently acquired by a private equity consortium and will soon be unlisted.
In terms of positioning, Monday nowadays is most comparable to HubSpot, along with Asana. However, HubSpot is 150% larger with revenues of $2.5 billion. Accordingly, HubSpot's enterprise value is significantly higher at approximately $40 billion.
Valuation Of Monday's Stock In Comparison To HubSpot
The EV/Sales (TTM) ratio of Monday and HUBS 0.00%↑ is almost identical, with a revenue multiple of 15-16. With an enterprise value of $15 billion and free cash flow of $300 million, Monday's recent run-up implies a cash flow multiple of 49 (based on 2024 numbers).
I expect free cash flow to increase by at least 30% in 2025, which is significantly more optimistic than management's original guidance. This results in a cash flow multiple of around 38 based on 2025.
This is no longer a bargain, but it is still quite fair given a gross margin of almost 90% and an excellent Rule of 40 score of over 60%.
The main competitor HubSpot is valued significantly more expensively, with a cash flow multiple of 73. However, it is growing significantly less efficiently, with a Rule of 40 score of 42%. So, in my opinion, the stock of monday.com is currently a lot more promising than the stock of HubSpot.
The Impact Of The AI Revolution On Monday.com
Of course, like all other enterprise application software vendors, Monday is hard at work developing and integrating Gen AI-based features into its software. But unlike some other application software providers, Monday's management does not raise expectations for AI too high. It's just too early.
Modular, customizable AI blocks allow Monday customers to use AI without technical expertise. With just a few clicks, customers can use AI-based functions such as "categorize" or "extract" to analyze data, identify patterns, and optimize decision-making. At the expert level, "power-ups" embed AI features across the entire Monday product suite to help customers solve their most critical challenges. From predictive risk assessment to CRM data automation to real-time service ticket resolution, these features are designed to enable faster decision-making and simplified processes.
Like Salesforce, HubSpot, and others, Monday has a vision of a scalable, AI-powered team of agents. These specialized digital "employees" will be able to perform tasks such as analyzing project risks, unlocking stalled sales deals, and identifying recurring customer service issues.
The first AI agent, called monday Expert, is expected to be launched in March 2025. This agent is designed to help onboard new users to the platform, provide guidance on how to accomplish certain cross-product actions, and even perform tasks on behalf of users.
All of this sounds almost too good and visionary to be true. And indeed, there is a lot of marketing hype involved at this point. It remains to be proven what the brave new world of AI agents will ultimately mean for monetization.
What I particularly like: Monday's Management remains cautious as usual when it comes to the outlook for AI. The initial 2025 guidance does not yet include any revenue contributions from the new AI product components or agents.
If Monday's new AI capabilities are widely adopted by customers as early as 2025, this will create additional potential for further growth. If the monetization of Gen AI continues to be challenging, this is not a deal breaker for achieving the prudent monday guidance.
Looking Ahead
I base my investment case on the assumption that Monday can reach annualized revenues of more than $2 billion by the end of 2027 and maintain growth of at least 25% p.a. and a Rule-Of-40 score of 50-55% until then.
Given its high profitability, then an EV/Sales ratio of 10-12 would certainly not be too high. This would imply a fair enterprise value of $20-25 billion in 2027. This would still leave upside potential of another 30-70% over the next three years.
So the medium-term outlook remains good. However, with such highly valued growth stocks, you always have to live with the risk that they will be sold off mercilessly in a market downturn. You have to be able to withstand an interim loss of 30-50% if you want to invest in such stocks as monday.com.
In any case, I plan to remain a monday shareholder for many years to come. Despite the rapid price increase, I believe the company is only at the beginning of its development.
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*Disclaimer: The author and/or related persons or companies own shares of monday.com. This post is an expression of opinion and not investment advice.