MNDY: Some Upside Despite Bearish Industry Outlook (NASDAQ: MNDY)

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In today’s corporate world that values ​​speed and efficiency, many have struggled to find a balance between the two, let alone find innovative solutions to improve their workflow. In recent years, we have seen an influx of project management [PM] software in the market that serves as a platform to facilitate collaboration between employees. Many of these have succeeded in going public, while the others on private markets have post-money valuations in the tens of billions. In this article, we will try to introduce monday.com (NASDAQ:MNDY) to growth investors looking to buy a company with large amounts of cash reserves, despite investing aggressively in producing better features for their customers and penetrating different markets. The app is not only versatile enough for its price compared to its peers, but also remains attractive in the long run considering its performance to date.

Value proposal

Gone are the days of updating spreadsheets, lines of sticky notes, and participating in lengthy weekly update meetings. With project management software, managers can now juggle their employees better, freeing up more time for their own tasks and allowing the team to accomplish goals in the most cost-effective way and on time. Large corporations are more obsessed with spending money to improve business efficiency and might choose to develop their own proprietary project management system or even rent it from some project management software company. Compared to small and medium-sized businesses (SMBs), these corporations can get deep discounts for the number of employees they have. This is where monday.com can meet the needs of a spectrum of businesses.

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Project management software prices per monthly subscription (website of the respective companies)

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User limits for the respective packages (website of the respective companies)

With Work OS as its main selling point, MNDY offers some of the cheapest and most flexible pricing when it comes to its packages, allowing SMBs to take advantage of every last dollar and equally focus on their largest customers with more employees. This partially increases the cost of switching for businesses as they continue to scale and require more users, as MNDY packages are priced quite competitively with their peers.

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MNDY Features (Second Quarter 2022 Earnings Presentation)

Another thing that dramatically increases the cost of switching for businesses is the features provided by the respective PM software. The company has come a long way since 2018, from a single board and a few columns and features to a complete and seamless solution for improving workflow. Its no-code and low-code capabilities allow any user to customize their experience to their own preferences, developing routines that would be difficult to change to better, cheaper alternatives.

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Feature-wise, MNDY provides a time tracking column that allows users to track time spent on tasks and a longer activity log than Smartsheet, which leans more towards a spreadsheet and lacks a built-in time tracking feature. This is extremely important for the transparency of the team and its leaders to track progress and be accountable and on time for their deliveries. Comparing the two biggest names in PM, MNDY has fewer integrations compared to its more expensive alternative, Asana. However, it does provide a larger number of templates (200+ vs. 50+), allows collaborative editing of documents, and handles email right on its platform.

As such, MNDY remains well positioned in the PM software industry compared to its peers.

Industry analysis

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MNDY Share Price and Peers (Looking for Alpha)

It is quite evident that there is a weakness in the software as a service (SaaS) industry and it affects PM software to a great extent. We saw higher numbers of cuts coming from the tech industry this year, which is still ongoing despite lower unemployment data in the US as a whole. PM software customers largely come from the technology industry, and by reducing overall headcount, the year-over-year growth rate of PM software users could take a hit in 2022, prompting analysts to lower their price targets for PM software. PM software shares in general.

With that said, we focus on the biggest detractor with a strong market position in the industry. This would provide investors with the greatest advantage after this period of persistent headwinds from macroeconomic conditions and challenges facing the industry.

Valuation

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Income Statement with Projections (Author’s Spreadsheet)

Since the company went public just over a year ago, we have to work with the limited data the company provides through its F-1 and 20-F filings. The company generates most of its revenue from its flagship platform, Work OS, for which we project growth through the number of paying customers and average revenue per paying customer. We believe that MNDY could continue to grow its customer base in the low double digits as its rapid product innovation beginning in 2018 has cemented its market position relative to its peers, providing that edge to continue to attract new customers. However, our projection of average revenue per user takes into account current macroeconomic trends, such as tech layoffs in 2022, and reduced the figure accordingly.

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For cost drivers, management did not provide a detailed breakdown, and therefore we modeled the company’s cost of service based on our projected addition of customers and number of employees. These two proxies generally affect most of MNDY’s service cost drivers, such as merchant and credit card processing fees, hosting fees, salaries, and related expenses. It is important to note that in our assumption, we project a drop in the number of employees in 2022 to match the current technology layoff trendand gradually rebound in hiring to double-digit growth rates by 2026.

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Employee Projection No. (author’s spreadsheet)

For operating expenses, we project research and development and general and administrative costs as forecast by management to increase in absolute dollar amounts but remain at least the same level as a percentage of total company revenues. We are more focused on projecting sales and marketing expenses, which are the largest component of MNDY’s operating expenses. Comprised of marketing and advertising expenses and commission paid to MNDY partners, we assume a sharp decline in the former in 2022, before increasing sharply in the following year and gradually reducing it. For the latter, we look at the number of partners since its rapid product innovation and forecast a declining growth rate as MNDY begins to become more established.

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No. of Partner Projections (Author’s Calculation Sheet)

Finally, we assume a net zero in financial income/expenses, taking into account the complexity of estimating its components (for example: foreign exchange income/expenses, interest income on deposits). We also assume that the company would not draw on its $80 million credit facility, thus incurring 0.2% per annum on undrawn amounts eligible for draw with fairly insignificant impacts.

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Unlevered FCF Projections (author’s spreadsheet)

We perform a discounted cash flow analysis to determine the present value of MNDY’s future cash flows. For this company, we decided not to add stock-based compensation back, as the SBC expense is part of the cost of service and the other parts of operating expenses. This is to account for the significant dilution of existing shareholders from what we have seen since its public offering.

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MNDY Capital Structure (author’s spreadsheet)

For MNDY’s capital structure, this section is probably the most volatile projection we can think of, mainly due to the zero cost of debt right now and the pegging of expected market returns to those of the US Treasury note. US to 5 years.

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Peer Compensations for MNDY (Capital IQ)

We decided to use a multiple-out method for our discounted cash flow model simply because the company is still relatively incipient in the public markets and its EBITDA is currently and is projected to be negative. As such, we chose to use the 25th percentile for our EV/LTM revenue multiple to be conservative in times of industry weakness that could impact revenue and considering the company’s rapid growth 5 years from now.

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Implied Capital Valuation for MNDY (author’s spreadsheet)

As such, we derive an implied valuation of 15.92% up from the current price at the time of writing.

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Sensitivity analysis of the multiple output method (author’s spreadsheet)

To mitigate the risk of understating MNDY’s WACC and exit multiple, the stock still has more room to fall and fewer upsides, considering the full range of exit multiples if WACC rises.

conclusion

Overall, the company’s revenue generation compared to the use of its cash reserves remains upbeat until the latest earnings report. We believe that the company’s competitive advantage of being a more versatile platform at a competitive price could continue to benefit MNDY in terms of revenue generation. Some key concerns that we believe could affect our projections are the continued expense of cash through sales and marketing and research and development. Both are necessary to ensure that MNDY continues to grow its business, which could be disastrous if such expenses lead to lower returns in terms of revenue. Another concern would be with the company’s stock-based compensation packages, as the drastic dilution of the value of existing shareholders must be offset by further growth of the company’s business so that the share price does not experience declines. massive.

We recommend monitoring whether the industry weakness continues after 2023 and considering opening a small position in case of further declines in the share price. It is imperative to note that the dilution of existing shareholders has been massive and is likely to continue for the foreseeable future, potentially causing further declines in MNDY’s share price.

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