Over the past six months, Monday.com’s shares (currently trading at $243.08) have posted a disappointing 16.1% loss while the S&P 500 was down 10.7%. This may have investors wondering how to approach the situation.

Given the weaker price action, is this a buying opportunity for MNDY? Find out in our full research report, it’s free.

Why Are We Positive On MNDY?

Founded in 2014 and named after the dreaded first day of the work week, Monday.com (NASDAQ:MNDY) is a software-as-a-service platform that helps organizations plan and track work efficiently.

1. ARR Surges as Recurring Revenue Flows In

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Monday.com’s ARR punched in at $1.07 billion in Q4, and over the last four quarters, its year-on-year growth averaged 33.3%. This performance was fantastic and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Monday.com a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

2. Elite Gross Margin Powers Best-In-Class Business Model

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Monday.com’s gross margin is one of the best in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an elite 89.3% gross margin over the last year. Said differently, roughly $89.33 was left to spend on selling, marketing, and R&D for every $100 in revenue.

3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Monday.com has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 30.4% over the last year. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Final Judgment

These are just a few reasons why Monday.com ranks highly on our list. With the recent decline, the stock trades at 10.7× forward price-to-sales (or $243.08 per share). Is now the time to initiate a position? See for yourself in our full research report, it’s free.

Stocks We Like Even More Than Monday.com

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