Why This Tech Stock Is Surging

The biggest gainer on Wednesday was a technology stock called Monday.com (NASDAQ:MNDY), which surged more than 24% during the trading day.

The company, which produces customer relationship management (CRM) software to help businesses manage their workflows, was still up some 19% in afternoon trading at around $216 per share. Monday.com stock jumped on a blowout earnings report and better-than-expected guidance for the coming quarters.

Let’s take a look to see if the stock is still a buy after this big jump.

Great step forward

The company launched in 2012 as Dapulse before changing its name to Monday.com in 2017. It went public in 2021, and its stock has been pretty volatile, soaring 40% in 2021, plummeting 60% in 2022, and surging 54% in 2023.

That volatility aside, what has been impressive is that Monday is already profitable — something that is no small task for a lot of tech startups.

The first-quarter results released on Wednesday illustrate the firm’s rapid growth. Monday generated $217 million in revenue, up 34% year over year. Operating expenses rose 18% to $198 million, resulting in an operating loss of $5 million, although that was significantly better than the $22 million operating loss in the same quarter a year ago. However, Monday’s non-GAAP operating income was $21.5 million, up from a $293,000 loss in the same quarter a year ago.

Overall, the company posted GAAP net income of $7.1 million, up from a $14.7 million net loss in Q1 2023. It was the fourth straight quarter of profitability, as Monday posted earnings of 14 cents per share in Q1.

The firm posted a net dollar-retention rate of 110%, which means it was effective in not only retaining customers but also up-selling them. Monday also increased its number of paid customers with more than 10 users by 18% year over year to 55,515.

This increase resulted in record quarterly free cash flow of about $90 million, up from $39 million the same quarter a year ago. The free cash flow margin, which is revenue converted into free cash flow, was 41% — up from 24% a year ago. This is a key metric, especially for a young company, as it provides the ability to invest and grow.

“Q1 represents another great step forward for monday.com, with strong revenue growth and profitability, as well as record free cash flow. These results are supported by recent adjustments made to our pricing model, which thus far have exceeded our initial expectations,” said Monday.com Chief Financial Officer Eliran Glazer. 

Analysts love Monday

Monday not only smashed analysts’ estimates for the quarter; it also issued guidance that was better than anticipated.

The company projects Q2 revenue of $226 million to $230 million, which would be 4% to 6% higher than Q1 and 29% to 31% beyond Q2 2023. Further, it expects non-GAAP operating income of $17 million to $21 million, which would be up year over year but down at the midpoint from Q1.  

For the full fiscal year, Monday sees its revenue at $942 million to $948 million, which would be up by 29% to 30% versus fiscal 2023. Non-GAAP operating income is projected at $77 million to $83 million, up from $61.6 million in 2023, while free cash flow is expected to be between $238 million and $244 million in fiscal 2024, up from $205 million last year.

Analysts liked what they saw, particularly Jefferies’ Brent Thill, who raised his price target for Monday to $270 from $250, saying the firm is delivering on its targets. The median price target for the company is $250, which is some 37% higher than the current price.

Monday.com stock is up nearly 22% year to date, with Wednesday’s run-up accounting for most of that gain. While it is hard not to like the path that Monday is on, keep an eye on its valuation, as the price-to-sales ratio is 12 and the forward P/E is 91.

Is the stock a buy? The valuation looks a bit too high, but there is a lot to like, so put it on your radar.

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