Based in Israel, cloud-based software platform monday.com Ltd. (MNDY) offers software applications in the United States, Europe, the Middle East, Africa, and internationally. The work operating system provider went public at $155 per share on June 10, 2021. While the stock has gained 32.9% in price over the past six months, its shares have retreated 5.2% over the past five days to close the last trading session at $292.09.

Despite reporting a robust third-quarter financial result last month, MNDY’s shares have dipped 27.9% over the past month. Its ARR grew 231% year-over-year, while its net dollar retention rate for customers with more than 10 users was more than 130%.

However, MNDY’s sky-high valuation has rattled investors. Although its strong top-line growth, driven by the growing adoption of its Work OS, and the launch of My Work, should help accelerate its user growth, competition from heavyweight software players such as Adobe, Inc. (ADBE) and Microsoft Corp. (MSFT) could cause its shares to retreat  further.

Click here to check out our Cloud Computing Industry Report for 2021

Here is what could influence MNDY’s performance in the coming months:

Positive Developments

In the third quarter, MNDY announced the launch of My Work, a platform for customers to centralize all open items and communications to improve operational efficiency and productivity across organizations. In addition, the company launched layouts within monday workdocs to offer customers even more freedom to adjust monday workdocs to meet their business’s needs. It also introduced a dynamic workflow builder to enable its customers to create new automation or integration without any code.

Furthermore, the software vendor partnered with leading IT firm Tata Consultancy Services and Hootsuite and Semrush, which have built apps on the monday.com marketplace.

Uncertain Growth Potential

Analysts expect MNDY’s revenues to increase 47.2% year-over-year to $443.18 million in 2022. But the company’s EPS is estimated to decline by 56.1% next year. Furthermore,  MNDY’s EPS is expected to remain negative next quarter and next year.

Mixed Financials

MNDY’s revenue increased 95% year-over-year to $83.02 million in the third quarter, ended September 30, 2021. Its gross profit came in at $72.81 million, representing 100.8% growth from the prior-year period. In addition, its net increase in cash, cash equivalents, and restricted cash stood at $8.29 million for the quarter. But the company’s non-GAAP net loss came in at $11.37 million, while its operating loss amounted to $29.21 million.

Its negative $8.11 million trailing-12-month cash from operations compares with the $118.67 million industry average. MNDY’s net income and EBITDA margins are negative 60.7% and 58.6%, respectively. And its ROA and ROTC are negative 17.4% and 122.8%, respectively.

Stretched Valuation

In terms of forward P/S, the stock is currently trading at 42.82x, which is 969.2% higher than the 4x industry average. Also,  its forward 37.85 EV/Sales multiple is 825.3% higher than the 4.09 industry average. And MNDY’s 18.16 trailing-12-month Price/Book ratio compares with the 4.40 industry average.

POWR Ratings Reflect Uncertainty

MNDY has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MNDY has a C grade for Growth. The stock’s mixed growth prospects are in sync with this grade.

Also, the company has a Momentum grade of C, which is consistent with its price returns over the past month.

In terms of Value Grade, MNDY has a D. This justifies the stock’s premium valuation multiples.

In addition to the grades I have highlighted, one can check out additional MNDY ratings for Stability, Sentiment, and Quality here. MNDY is ranked #103 of 168 stocks in the F-rated Software – Application industry.

Click here to check out our Software Industry Report for 2021

Bottom Line

Surging demand for MNDY’s unique low-code no-code technology has boosted its ARR. However, amid intensified competition from established players, the stock’s premium valuation has added uncertainties to its growth prospects. Therefore, we think investors should wait for its valuation to stabilize before investing in the stock.

How Does monday.com (MNDY) Stack Up Against its Peers?

While MNDY has an overall C rating in our proprietary rating system, one might want to consider taking a look at its industry peers, Open Text Corporation (OTEX) and Commvault Systems, Inc. (CVLT), having an A (Strong Buy) rating.

Click here to check out our Cloud Computing Industry Report for 2021

MNDY shares fell $7.09 (-2.43%) in premarket trading Monday. Year-to-date, MNDY has gained 63.30%, versus a 24.20% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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