The total addressable market is 200 times larger than the revenue. $56.1 billion TAM opportunity.
Consumer satisfaction level is quite high and promises significant future growth opportunities.
The relative valuation analysis indicate that the stock is undervalued compared with top 100 tech stocks.
Buy below $338.
Monday.com (MNDY) offers innovative solutions in SaaS industry as the company allows its users to build their own software applications using Monday.com’s tools. Consumers are highly satisfied from the services of the company. The business has huge total addressable market as the TAM is 200 times larger than the TTM revenue. Our valuation analysis indicate that the stock is undervalued and offers attractive entry point for long-term investors.
Monday.com offers modular building blocks that are being used to create software applications and work management platforms. Monday.com platform helps enterprises to built their special software applications which match with their unique requirements and demands. The platform is called Work OS – Work Operating System. It enables enterprises to build their own CRM, marketing, project management and other software using their preferred functions and visual templates. The in-house software development solution provides attractive options for enterprises as they get opportunity to create their own software in low or no code environment. The service challenges the business models of the largest SaaS players which are specialised in specific segments and offer consumers their own non-customizable software.
Given the increasing demand for monday.com services the management assesses $56.1 billion total addressable market opportunity. The TAM is expected to grow at 12% CAGR reaching to $87.6 billion level by 2024. The biggest part of the estimated TAM represents Collaborative Applications with $21.7 billion opportunity. Marketing Campaign Management segment is estimated to be $14.3 billion opportunity while Sales Force Productivity Management is estimated to be $11.5 billion.
The adoption of SaaS services into business operations is essential requirement considering the fact that it increases the agility of businesses. According to a study conducted by MIT, firms which prioritise agility were able to grow at 37% faster rate and record 30% higher profits in comparison with those enterprises which doesn’t prioritise the agility of their operations. Currently the SaaS industry has already achieved substantial penetration in business world. According to a survey, 73% of IT leaders said that their corporations use 100-1,000 SaaS applications for their operations. This promises incredible opportunity for Monday.com as its offerings enable corporations to build their own software platforms integrating different services in one platform.
The company provides wide range of pricing packages. The annual subscription package offers 18% discount compared to monthly packages. Monday.com charges consumers on per-seat basis, ranging from $0 to $16. The company also offers enterprise pricing package which provides all its services with pre-determined price for entire organisation.
Monday.com has significant geographic diversification as the company provides services in 190+ countries in 14 languages. Its work management tools are available for more than 200 business industries as 70% of consumers represent non-tech sectors. To fuel its continuous growth the company is actively widening its product base. In 2020 alone the company launched Apps Marketplace and Docs solutions.
The number of enterprise customers with more than $50K ARR is growing quite fast. The number increased from 185 in Q3 2020 to 613 in Q3 2021 recording 231% YoY growth. The consumer satisfaction level is well presented by the quite high net dollar retention rate. In Q3 2021 Monday.com recorded more than 130% net retention rate among consumers with 10+ users. The rate reflects improvement from Q2 2021 level of 125%. The rate is above the SaaS median rate of 120% and is in top quartile, which starts from 124% level.
The business has 4.7 rating out of 5 on g2.com platform. The rating is based on 3,200+ ratings. 83.6% of survey participants ranked 5 and another 13.8% ranked 4. Users express their positive opinions about the services of Monday.com. They are mainly satisfied from appropriate templates, intuitive interface and high quality consumer support. Collin J. is the Director of an enterprise with more than 1,000 employees, his company uses Monday.com products and he expressed his opinion about the platform:
Monday does a great job of creating an integrated platform that allows your whole team to collaborate on projects, comment on files, and run basic reports. The price point is affordable and the software is pretty intuitive to use, so there isn’t a huge ramp-up time like you’ll find with Salesforce, SmartSheet, etc.
Director of Marketing of another company – Tyler H. also expressed his positive opinion about the platform:
Monday.com has completely changed how we manage projects and get stuff done. We primarily use this to manage our agile marketing team. Using Monday.com I was able to implement an agile framework and was able to use preset templates to easily set this up.
The usage of the platform brings considerable benefits to its consumers. According to a research conducted by Forrester users of the platform get 288% ROI and reduce hours spent on meetings by 50%. The cumulative saved hours for its entire consumer base exceeds 15,600 hours, which indicates that the usage of the platform brings substantial efficiency improvement to users. Samyuktha Shivakumar – Global Marketing Operation Manager at ThoughtWorks expressed her opinion about the incremental efficiency attributed to the Monday.com platform:
Thanks to monday.com, we are now able to budget the team’s time and efforts much more scientifically, leading to increased operational efficiency.
Monday.com has quite high NPS score which underlines the high satisfaction level among consumers. According to comparably.com the NPS is 61, which is higher than 2020 result of 59. The score is better than Monday.com’s most comparable peer – Asana’s (ASAN) score of 42. Monday.com has 83% consumer loyalty rank, which helps the company to build strong user base.
The business has wide moat as its business model creates substantial switching costs for those consumers which decide to change their SaaS provider. If a consumer decides to migrate from Monday.com platform then it requires to transfer huge data to a new platform and train its employees to use a new platform. These processes require time and can disrupt business operations causing considerable losses.
Risks The company faces stiff competition from traditional SaaS providers which propose ready-to-use and specialised platforms to their consumers. It is difficult to predict which kind of business model will be more preferable for consumers, but it is evident that companies with simple business models will avoid the hassle concerned with software creation and will prefer traditional SaaS platforms.
The company hasn’t established large scale yet which indicates that new entrants can grab growth potential from the company. Increasing scale will help the business to establish strong moat and will protect the business from newly emerging competitors.
Monday.com generates significantly high profitability as the TTM gross margin stands at 87.1% level. The management was able to improve the margin in recent 3-year period as in 2019 the margin was 84.7%. At the same time the company improved operating profit margin as it increased from -118.5% to -59.46% level. The operating cash flow margin improved substantially as it was -46.9% in 2019 and climbed to -3% level by 2021.
The biggest part of operating profits is spent on selling & marketing as TTM S&M expense margin stands at 94.6% level. The number is significantly lower than 2019 margin of 151.8%. In 2019 the company spent $119 million on S&M which brought additional $83 million revenue next year. It means $0.7 additional revenue per $1 spent on marketing. The number declined to $0.53 by 2021, which is also a great result. Considering the 87% gross margin we see significant ROI potential from S&M expenses. The R&D expense margin is comparatively lower as it stands at TTM 24.1% level. The number was higher in 2019 – 31.7%. The decline reflects management’s intention to gradually cut operating expenses and ameliorate bottom line.
Valuation To calculate the relative value of the stock we have regressed top 100 tech stocks’ P/S FWD ratios against their estimated 3-year revenue CAGRs and TTM gross margins. As a result we have a model with R square of 70.7% and F stat of 109.9. The model yields implied P/S FWD ratio of 44.5 which indicates stock value of $313.6 – 7.5% higher than the current price.
Monday.com’s closest peer is Asana which provides similar services for project management industry. Asana P/S FWD is 37.5 against Monday.com’s multiple of 43.9. Asana Price to Gross Profit ratio is 46.5, lower than Monday.com’s ratio of 56.3. The premium valuation is attributed to higher expectations as analysts anticipate 66.8% 2-year revenue CAGR for Monday.com and 48.9% 2-year revenue CAGR for Asana.
To calculate the intrinsic value of the stock we have built a DCF model. First we calculate WACC. To calculate the beta coefficient we have regressed 6-month weekly data and got beta coefficient of 1.42.
For equity risk premium we have used 4.53% rate and for risk-free rate we have used 2% rate. As a result we get WACC of 8.4%.
During the last 2-year period the company recorded 96% revenue CAGR. For the upcoming 10-year period we anticipate 40% revenue CAGR, which yields just $4.6 billion revenue for 2030. For EBITDA margin we anticipate 35% level by 2030 and gradual improvement to that level.
As a result we get stock value of $337.7, which is 15.6% higher than the current price.
For the upcoming decade we anticipate 50% share count dilution. In 2030 we anticipate Price to FCF ratio of 35, which yields 10.7% annual price appreciation opportunity.
We have also conducted scenario analysis to assess expected returns in different EBITDA and growth cases. As a result we see that the 50% growth can bring 18.6% annual return to shareholders, which is quite realistic scenario.
So our valuation model indicates that the stock is undervalued and offers great entry point for long-term investors.
Conclusion Monday.com’s business model is well differentiated from other SaaS providers which can help the company to gain competitive edge against industry players. The new model is highly appreciated among consumers as the net retention rate is quite high. The stock is undervalued compared with sector players. Our DCF model indicates that the stock is undervalued and can bring double digit returns in upcoming years.