Monday.com stock popped after another strong quarterly report.
Shares of Monday.com (MNDY 3.48%) climbed 19.3% last month, according to data from S&P Global Market Intelligence. The workforce management software platform notched another strong quarter, and investors were impressed.
Quarterly earnings were comprehensively impressive
On May 15, Monday.com reported quarterly revenue of $217 million and adjusted earnings per share of $0.61. Both figures were well above analyst expectations, and the quarterly sales marked an impressive 34% growth over the prior year.
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That growth translated to strong cash flow generation. The company reported nearly $90 million of quarterly free cash flow, more than doubling the amount produced in the first quarter of 2023.
Monday.com also reported 110% net revenue retention. The company is getting 10% more revenue from customers that were on the books one year ago. Its net dollar retention is even higher for larger customers, which is favorable. Monday.com retains a high percentage of customers, and it’s increasing the amount of business that it does with existing accounts. That’s a strong indicator of customer satisfaction, product quality, and an effective sales process. That’s also a great cornerstone for growth because it relieves pressure on the sales team to acquire new accounts.
Monday.com’s full-year guidance suggests that sales growth should remain roughly steady at around 30%. The company expects its operating margin to remain stable, but it expects free cash flow to rise as a percentage of revenue, meaning that cash flow growth should continue to outpace the top line. That’s a bullish outlook, indicating that the company expects to keep the momentum rolling.
The stock’s valuation ratios are surging
Monday.com’s rally has led to higher valuation ratios. The stock’s forward P/E ratio and price-to-free-cash-flow ratio rose 15% last month.
LZ PE Ratio (Forward) data by YCharts
Its forward P/E ratio is now over 90. That’s expensive, even with its strong growth rate. If the company maintains its current rate of sales growth and margin expansion, then the valuation will look completely justified within a few years. However, it will likely be prone to volatility in the short term. Any macroeconomic or company-specific issues that jeopardize its prospects could lead to significant downside.
Monday.com receives strong reviews from customers and industry analysts, so it holds a solid competitive position today. That said, it still faces stiff competition from large, established peers, and it hasn’t established an unassailable economic moat to hold that competitive advantage.
Monday.com has a strong bull narrative, but investors should keep the risks in mind.
Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Monday.com. The Motley Fool has a disclosure policy.