Growth stocks can be a wild ride. The long-term upside usually comes with stomach-churning volatility. Monday.com (NASDAQ: MNDY) is currently experiencing ups and downs. At the time of this writing, shares have fallen approximately 28% from their highs.
The company’s software-as-a-service business model is disrupting how employees collaborate in the workplace, and additional catalysts like product expansion and artificial intelligence (AI) could produce long-term growth capable of delivering outsized returns. The company is executing at a high level, making this recent drop a buying opportunity.
Here is what you need to know.
Monday.com’s primary business is its cloud-based collaboration software. It’s a low-code, highly customizable platform where people can organize tasks, share information, and integrate automation and apps to improve workplace efficiency. Today, over 225,000 customers use the product in 200 countries.
The company’s growth model is brilliant. It’s free for the first two people in an organization, making it easy for any company to try. If they like it, the software spreads through the company, climbing the pricing ladder as more people use it. This sales process has produced a solid 111% net revenue retention rate, underlining how customers spend more over time.
Monday.com’s long-term upside depends on how it builds on its core project and task management software to penetrate adjacent markets. Since 2022, the company has launched several new products, including a customer relationship manager (CRM) for sales, Dev for product and development teams, and Service for IT and support. Monday.com has integrated various AI tools and features to enhance its products, leading to better user experiences and stickier customers.
Today, Monday.com generates $906 million in annual revenue and grew over 32% year over year in Q3. How high Monday.com’s ceiling is remains to be seen, but its product roadmap signals its intention to become a do-it-all enterprise software company. Some of the world’s largest technology companies, like Adobe and Salesforce, deal in enterprise software.
If Monday.com consistently converts companies to paid users and moves them up the pricing ladder, it will have a long growth runway.
Competition is fierce in enterprise software, with so many players that it can be hard to find the best of the bunch. Investors can use the Rule of 40 to identify which companies are performing at a high level. The Rule of 40 is a straightforward metric that measures a company’s ability to grow without sacrificing profitability. Add a company’s revenue growth rate to its free cash flow margin to calculate its Rule of 40 score.
