monday.com

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

monday.com Ltd. is a SaaS company providing a work operating system where teams can plan, organize, and manage their work, with different tools for visibility, automation, and collaboration.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: monday.com operates a cloud-based platform designed to streamline workflows and enhance collaboration within organizations. Their core offering is a Work Operating System (Work OS), which is a customizable platform that allows teams to plan, manage, and track their projects, processes, and daily work tasks. The platform’s features include project management, workflow automation, sales CRM, inventory management, and task management, with integrations to various third-party applications. They monetize by charging subscription fees for accessing the platform.

  • Revenue Distribution:
    • monday.com primarily generates revenue through subscription fees from various customers.
    • The company reports that the majority of its revenue is derived from customers subscribing to its platform.

Industry Trends:

  • The market is highly competitive and rapidly changing due to the constant development of new technologies.
  • There is an increase in automation, personalization, and data analytics for workplaces.
  • Organizations are moving to digitalize their operations, as is seen in the shift to cloud-based software.
  • Companies are focusing on improving data privacy and cybersecurity.

Competitive Landscape:

  • The market for project management software is intensely competitive, with various players including well-established companies like Atlassian and Asana and also smaller firms offering similar services.
  • Many companies, such as Microsoft, offer their own suite of tools for workflows and project management.
  • To compete in this market, companies like monday.com need to offer unique value propositions that their competitors cannot easily replicate or at least quickly replicate.

What Makes monday.com Different?

  • Flexibility: monday.com emphasizes that its platform is highly flexible and customizable. This gives a differentiated service for its clients, as each team can tailor it to its needs.
  • Scalability: As discussed, they have a business that is very scalable, meaning it can grow efficiently.
  • Platform ecosystem: monday.com has a marketplace for integrations and apps, expanding its capabilities.

Recent Concerns and Problems:

  • In the latest earnings calls, it was noted that some of monday.com’s newer products were not performing as well as expected. However, management views this as a typical part of growth as they develop and fine-tune new offerings.
  • There have been fluctuations in stock prices for technology companies recently, particularly after tech companies showed slower growth. Investors need to keep their long-term goals and value in mind.
  • The company has faced criticism about the high level of stock-based compensation for employees and how that affects the company’s earnings. While stock based compensation is still relatively high as compared to other firms, they have been trying to keep it down while still having the benefits of it.

Financial Performance Analysis:

  • Revenue Growth: monday.com has displayed impressive revenue growth over the last 3 years. In fiscal year 2023, monday.com’s revenues increased 41% year-over-year to $720.7M, which shows strong growth.
    • Notably, revenue growth appears to be slowing, as 2022 had a 68% year-over-year increase. For FY24 the expected YoY revenue growth is at about 29%.
  • Operating Expenses:
    • The company has high operating expenses. Sales and marketing and R&D have a significant cost.
    • The company seems to be prioritizing growth over margins, as is seen from their marketing and R&D expenses. In their latest report, the company stated that they had exceeded their operating margin guidance for the year.
  • Profitability:
    • monday.com is not yet profitable and has shown net losses on their P&L. However, their operating loss has declined as a percentage of sales and the company is striving to become profitable in the near future.
  • Cash Flow:
    • The company has a strong cash position which provides stability to their business, also their cashflows seem to improve each year, but a significant amount of the cash inflow is from external sources.

  • Balance Sheet: * monday.com has a very good liquidity position due to having a high cash balance and few short-term debt. It should be noted that a vast majority of their assets are intangibles like goodwill, which should be further investigated.

  • Guidance: In its latest earnings call, the company’s CFO said that revenues will grow YoY by at least 27% in 2024, and will have a non-GAAP operating profit of at least $38 million.

Moat Analysis: 3/5 Based on the analysis, monday.com has a moderate moat. Here’s the breakdown:

  • Intangible Assets:
    • They have proprietary software and technology, and have patents on some of its underlying tech.
    • The company has high marketing and R&D spend which are indicators of moat development.
    • Overall the brand itself is not as valuable as other aspects of its business.
  • Switching Costs:
    • Switching costs are substantial for a firm like monday.com.
    • Users of Work OS tools tend to integrate the tools directly into their work flow, making a switch a large undertaking. This means companies can potentially charge a premium without significant resistance.
  • Network Effects:
    • While their platform does not have a direct network effect, their marketplace allows them to create an ecosystem around their product.
    • Having integrations with other systems means that more users want to use the platform.
  • Cost Advantages:
    • The company does not have any apparent cost advantage over its competitors.
  • Moat Strength: While monday.com has created some barriers that prevent competitors from entering its market, it does not have a moat that is particularly long-lasting or resistant to disruption. Their current moat is heavily reliant on product superiority and switching costs, which are more easily challenged than a network or cost advantage.

Risks to the Moat and Business Resilience:

  • Intense Competition: The SaaS market is extremely competitive, with both established players and new entrants constantly trying to gain market share.
  • Technological Obsolescence: Rapid technological change could quickly make monday.com’s platform less appealing. There is risk in how their new offerings can compete with the current market leaders.
  • Economic Down Turns: Recessions can lead to companies lowering IT spend and switching to less expensive products, which can reduce the demand for the platform and force them to lower prices.
  • Data Privacy and Security Concerns: Security breaches and privacy violations in the company’s operations and data can affect the company’s trust and reputation.

Understandability Rating: 2/5 The business model of monday.com is moderately difficult to understand for someone unfamiliar with SaaS or project management platforms. This is because, you must understand their platform and understand how they make money to truly understand the moat and business. They also have a bit of complicated financial statements due to its many moving parts and new offerings, which further compounds the difficulty in assessing the overall business.

Balance Sheet Health Rating: 4/5 The company’s strong cash position and low short-term debt give it a fairly good rating. However, a major part of their assets is intangibles such as goodwill, and its valuation heavily affects the value of the business. The company has to focus on improving profitability as it has not been profitable since its inception.