Shares of project management software maker Monday.com (NASDAQ:MNDY) jumped 10.7% in the morning session after the company reported an impressive "beat and raise" quarter. Third quarter results beat Wall Street's expectations for key topline metrics including revenue, billings, and ARR (annual recurring revenue). Additionally, EPS blew past analysts' expectations, and it continued to generate strong free cash flow. Looking ahead, guidance came in strong as management raised full year outlook for revenue and non-GAAP operating income, with both metrics exceeding Wall Street's estimates.
On the other hand, its net revenue retention fell, but the positives clearly outweighed the negatives here. Zooming out, we think this was a strong quarter, showing that the company is staying on track to profitability while still growing fast. There have always been questions about the competitive space of workflow and project management software. Bears argue that there is lack of differentiation between platforms in the space, and this could lead to low pricing power and high S&M spend that will not abate. Bulls argue that the addressable market for digitizing legacy or even paper-based workflows is huge, allowing for multiple players to grow profitably and win. This quarter gave some support to the Bulls.
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What is the market telling us:
Monday.com's shares are very volatile and over the last year have had 37 moves greater than 5%. But moves this big are very rare even for Monday.com and that is indicating to us that this news had a significant impact on the market's perception of the business.
The previous big move we wrote about was 24 days ago, when the company dropped 6.7% on the news that the yield on the benchmark 10-year Treasury bond topped 5% for the first time in over 15 years. Even with relatively decent inflation readings as of late, this could mean higher rates for longer, which would make it more costly for consumers to take out mortgages and hold credit card debt while making it more expensive for businesses to take out bank loans to fund investments and projects. As a reminder, higher rates hurt equity valuations because a company's stock price is essentially the present value of its future cash flows discounted at a discount rate. The higher the prevailing interest rate environment, the higher the discount rate. Additionally, these dynamics are more detrimental for growth stocks (like tech names) as more of the company's value is prescribed to its long-term potential.
Monday.com is up 31.2% since the beginning of the year, but at $156.57 per share it is still trading 16.1% below its 52-week high of $186.72 from July 2023. Investors who bought $1,000 worth of Monday.com's shares at the IPO in June 2021 would now be looking at an investment worth $875.86.
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