Shareholders of monday.com would probably like to forget the past six months even happened. The stock dropped 52.4% and now trades at $69.40. This may have investors wondering how to approach the situation.
Following the drawdown, is now the time to buy MNDY? Find out in our full research report, it’s free.
Why Are We Positive on monday.com?
With its colorful interface of boards, columns, and automation that replaced the chaos of spreadsheets, monday.com (NASDAQ: MNDY) is a cloud-based work operating system that helps teams manage projects, track tasks, and streamline workflows through customizable interfaces.
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 $1.41 billion in Q1, and over the last four quarters, its year-on-year growth averaged 25.5%. 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 89.1% gross margin over the last year. Said differently, roughly $89.05 was left to spend on selling, marketing, and R&D for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. monday.com has seen gross margins improve by 0.2 percentage points over the last 2 years, which is slightly better than average for software.
3. Customer Acquisition Costs Are Recovered in Record Time
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
monday.com is quite efficient at acquiring new customers, and its CAC payback period checked in at 30.8 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a strong brand reputation, giving it more resources pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments. 
Final Judgment
These are just a few reasons why monday.com ranks highly on our list. With the recent decline, the stock trades at 2.2× forward price-to-sales (or $69.40 per share). Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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