Authored By Louis Stevens
This is the second installment of the Upside Surprises series.
Upside Surprises (as in the series you're currently reading) is valuable insofar as, even if the proposed catalysts for upward revisions to guidance do not impact the companies' Q2'24 reports and corresponding Q3'24 and full year 2024 guidance, these catalysts are still part and parcel of the overarching long term investment theses for these companies.
That is, if you own these businesses or are thinking of owning them, then understanding these catalysts will give you a better understanding of these businesses and what will drive their free cash flow per share growth over time (as Briefs series readers know well, free cash flow per share drives share price appreciation).
Monday's Free Cash Flow Per Share Alongside Its Share Price
So, without further ado, today, we will consider Monday.com's catalysts for a potential upside surprise (an upward revision to its Q3'24 and 2024 guidance) in its Q2'24 earnings report.
Monday.com's Catalysts
- MNDY guidance upside = Dev/CRM generally available to installed base results in faster than expected growth
In LAS' recent Multi-Product series, I detailed Monday's exceptional multi-product platform execution, which has entailed successfully fielding a series of products beyond its legacy project management product, which has accounted for the bulk of its growth heretofore.
We can see the evolution of the Monday platform and its cadence of launching new products and features in the chart below:
Beyond its legacy project management product, Monday's latest products have been its app marketplace, which continues to grow and address the long tail needs of its clients; its Dev product, designed for software developers who need a platform to manage their creations; its sales CRM product, designed for businesses to manage their relationships with their clients and prospects, and the company has announced the future release of products known as Service and Code. We can see Monday's estimated TAMs for its project management, CRM, Dev, and Service products below:
Of course, it's nice to tell the world you're doing something, but we should always look to the concrete data for confirmation, and Monday has been delivering.
Its Dev and sales CRM products have been growing.
In Monday's Q1'24 report, it revealed that not only were Dev and CRM growing, but also they accelerated their growth rates in the quarter. We can see this acceleration in the charts provided by Monday below:
Monday's Sales CRM Accounts Reach New Heights
Monday's Dev Accounts Reach New Heights
Importantly, Dev and CRM were not generally available to all of Monday's customers prior to Q1'24. In Q1'24, Monday made them generally available (GA) to all its customers, hence the acceleration in growth.
This is a key factor in Monday potentially reporting an upside surprise, i.e., revising its guidance upward, in Q1'24.
Notably, Monday has over 225k total customers, so it is selling into a huge installed base here.
Monday's 225K+ Customers
Recall our discussions we've had on Splunk, in which we reviewed that Splunk 2-3x'd its ARR over a 2-3 years simply by selling into its installed base. It grew at this rate while scantly adding any new logos due to Elastic and Datadog capturing share aggressively from 2020 to 2023.
Selling into a company's installed base can be a huge, sometimes under-apperciated, vector for growth, and Monday's growth acceleration for Dev and CRM illustrate its potential impacts.
Growth Of Monday CRM and Dev Relative To Its Legacy Project Manage Product
So Monday could accelerate growth, provide upwardly revised guidance, and surprise Wall Street by selling into its latest products installed base whose growth may further accelerate from here, in the same way it accelerated in Q1'24 when it was made GA to Monday's existing customers (the aforementioned installed base).
Monday's Linearly Scaling Sales
Importantly, any acceleration or sustained growth above 30%, is just barely being priced into Monday as of today. Here's the math underlying my assertion here:
As of today, Monday trades at ~45x EV/2024 fcf, using margins of ~25%. Monday has stated that it will achieve a margin profile over time that resembles something closer to Atlassian, and it flexed its margin muscles in this respect in its Q1'24 report, in which it reported 40% free cash flow margins.
Using 35% free cash flow margins on TTM sales of $850M (as of today), Monday trades at 36x EV/FCF, which is a valuation that represents a huge discount to many 5-10% growers, such as Waste Management, Cintas, and Costco.
Monday's Incredible Free Cash Flow Margins
In short, in light of the company's phenomenal multi-product platform execution, there's likely many upward revisions to guidance to come for Monday.com
Disclosures:
L.A. Stevens has rated Monday.com a "buy."
