Loading summary
Transcript66 lines
- [00:00]
Brett Schaefer
Foreign.
- [00:05]
Ryan Henderson
Welcome to Chitchat Stocks.
- [00:07]
Brett Schaefer
On this show, host Ryan Henderson and Brett Shafer analyze businesses and riff on.
- [00:12]
Ryan Henderson
The world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan.
- [00:20]
Brett Schaefer
Brett or any other podcast guest is.
- [00:22]
Ryan Henderson
Not formal advice or recommendation.
- [00:24]
Brett Schaefer
Now please enjoy this episode. Welcome into the Chit Chat Stocks podcast, a podcast to help you find your next great investment. My name is Brett Schaefer and today we have another stock research episode from Ryan, co host of the show we are covering. Monday.com if you've never heard of this company, I should say its ticker is M N D Y. You can look up while you're listening to the show, maybe some metrics on fiscal AI, look at where the stock is trading, all that good stuff. If you are listening to the show for the first time, make sure to follow us wherever you are a listener. Apple podcast, Spotify, YouTube, give us a five star review if you can. And we are going to today cover a comprehensive overview of Monday.com its history, business model, management, what we think of its competitive advantages, valuation and what Ryan thinks about the stock. Today we'll close with his investment decision as we always do with these stock research episodes while I ask him and pepper him questions throughout the episode. So Ryan, you have some metrics here to introduce Monday.com take us through the business. How are you going to introduce what this company is? A not the this isn't an AI sexy space startup. It's B2B SaaS. But it's quite interesting. They're growing quickly. Take us through some of the numbers and how you want to introduce the company.
- [01:57]
Ryan Henderson
Yeah, I've looked at a lot of B2B software companies. I feel like sometimes I throw around kind of the that terminology, but just business to business. Software as a service so not licenses. Cloud based. I've looked at a ton of those companies lately and I'm starting to get worried that I'm wasting my time. And part of that is because a lot of the B2B SaaS companies, especially over the last four months have had really rough runs and the stocks have gone nowhere. Actually they've gone down quite a bit but over the last year or so they haven't really gone anywhere. But the other part is it's for most the B2B SaaS companies it's, it's very competitive. It's a very competitive industry. The profits constantly feel theoretical like there's always huge adjustments from the management teams. Stock based compensation is usually Absurd at these companies and the management teams in general. And the proxy statements usually piss me off. Like, it's one of those things where I go through the work, I think, wow, this is a great business. And then I read the proxy statement and I somehow feel angry at management.
- [03:13]
Brett Schaefer
Well, you kind of get that situation where you go, oh, hey, they're posting 20% adjusted EBITDA margins, maybe 30%, something like that. And you go, okay, well, the bottom line, margins should be okay. And then there's nothing there. So you, I've been there before. It's taken me away from the industry. But what attracts you to money.com in particular?
- [03:37]
Ryan Henderson
Yeah, let me share a few stats because these are some facts that have kept me coming back to Monday.com so in 2019, they had 90,000 total paying customers. A lot of those were small businesses. Today they have more than 250,000. More of those are enterprise customers than there was back then. In 2019, Monday had 73, just 73. So, like, think about this. It's a pretty small figure. Monday had 73 customers that were paying more than $50,000 a year for their software. That was in 2019. Today they have more than 4,000 customers paying more than 50 grand a year for their software. In 2019, Monday generated $78 million in revenue. This year they're generating, or they're going to generate roughly 1.2 to 1.3 billion in revenue. A couple more stats here, so bear with me. In 2019, Monday had less than 500 employees. Today they have about 3,000 employees. Now, I, I, I know that's not like a stat shareholders love to see, but I'll talk about why I guess it's important. In 2019, Monday.com had $176 million in cash and investments on their balance sheet. Today they have 1.7 billion in cash and investments on the balance sheet. And on average, customers spend 12% more with Monday.com every year. So 112% net revenue retention rate. I list these facts not to bore listeners, but to illustrate a point. Despite the frustrations with management, the spending, all this stuff Monday.com today, the organization that you look at and see today has the ability, ability, emphasis on ability here, because they're not actually doing it. They have the ability to earn way, way, way more profits than they did in 2019. The organization is way larger. And it's larger in basically always revenue. Customers, employees, you name it. The capacity to earn, AKA future earnings is what investors care about, care about. And that is why I keep Coming back. So as frustrating as it is to look at stock based compensation, employee count growing really, really quickly with the software company there, it can be worth the investment. And that is kind of the, I mean that's the software playbook, right? It's high fixed costs, low marginal costs, build a product that you can sell widely, be the leader, have the scale advantages, get the customer lock in, invest a lot today to reap the benefits down the road. I'll leave it there. But that is what has kept me intrigued with Monday.com is just the sheer growth.
- [06:38]
Brett Schaefer
Okay, before we get into the history, just a couple of follow ups. One I should note for the listeners in Ryan's show notes here he has over the last 12 months Monday.com generating $1.1 billion. That's us correct in revenue, just gap profitability operating income wise, only $5 million in earnings. Now. What are, I'm assuming SAs like gross margins, 80%, something like that. And correct me if I'm wrong there, but as we go through this episode, should listeners kind of assume that there is the potential for an Adobe like Autodesk, like what have you operating margin at scale for this business? 30%, maybe even higher.
- [07:25]
Ryan Henderson
Yeah, maybe in the long, long run.
- [07:28]
Brett Schaefer
It'S possible Constellation Software is running it. What would they, they could earn that, is that, is that what we should assume? It has the same basic unit economics.
- [07:37]
Ryan Henderson
Yeah, there's no big outlier here like 90% gross margins. They spend a ton on operating expenses as you'd imagine and theoretically as the business scales those will come down and there should be operating leverage. I'll go through the numbers sort of towards the end of the episode on what I'm expecting. But yes, it should follow if, if everything goes right. Should follow the kind of the standard blueprint for a SaaS company where you, you get great operating margins in the long run. But let's talk about the Monday.com story. How do we get here? It's not that old of a business. It basically launched 10 years ago, little over and it's, I don't want to say disrupted, but it's carved out a huge chunk of the market in what is already a very competitive space. So let's talk about the story. Monday.com was actually born out of a old flame of ours, Brett Wix.com this was initially intended to be an internal tool for wix. Did you know that?
- [08:44]
Brett Schaefer
No, I did not. But seeing the stock based compensation similarities, I guess I can see where Monday.com got their employee incentive strategies and well, yeah, they're kind of similar on the income statement. I'll just leave it at that.
- [09:04]
Ryan Henderson
Yeah. And we've talked about this before but WIX and Monday are both Israeli based and there is like they are for the most part the big tech companies in that area of the world. There's some others as well, but they are considered kind of big tech in that area. So sometimes they kind of operate like it like they operate like. It feels like they operate like the Metas and the Googles of Silicon Valley. But in Israel about 100 billion in revenue.
- [09:36]
Brett Schaefer
Yeah.
- [09:38]
Ryan Henderson
Yeah. And not obviously the employee base is much smaller but there's kind of those parallels. It almost and they were privately funded for a long time so sometimes it kind of feels like they still act like a VC backed company. But I'll get into that in a second. Roy Mann and Aaron Zinman, which they're both still leading the company today as co CEOs. They were both working at Wix. They wanted to build an internal tool for task management to help solve some of the scaling and communication issues that the team was experiencing. And also pause here to say like if you don't work in software or in the software industry or if you especially at the startup level, this is a very common problem at early stage companies. There is tons of work, tons of tasks, tons of things that need to get done. The tasks are getting lost. It's hard to know which tasks should be prioritized because you're getting new ones every single day. Some of its bugs, some of its new product features. It's hard to know like do we maintain the existing product, do we try to build the new product? And they were basically dealing with this at wix and they were saying we need a better system for organizing these tasks and managing and prioritizing. And so they put Aaron and Roy on the task of building it. And I think basically it was good commercial launch. I'll talk about that in a second. But there was in the internal WIX deployment when they launched there. Apparently everyone at WIX loved it. I can't I say loved but I don't think anyone is like in love with task management software. It's more so provided value. It provided value. It was an improvement from their existing system. And so Roy and Aaron, I hope I'm saying that right, might be Eran. Eran decided to name the company and spin it out on its own. Now in case you're wondering, WIX did get compensated for this because I was a little worried. I'm like wait. They just Spun it out. Why didn't Wix like take it? Because it was made on wix's time obviously, and wix's resources. WIX got a inequity stake in the business. I'm not totally sure what the exact amount was because it got diluted down over time over the various Series A, Series B, all those funding rounds, but I believe at IPO it was worth about $400 million. So they were compensated well for allowing Roy and Iran to spin out the business. Roy and Iran named it DA Pulse. Initially the company's name was D Pulse D A P U L S E terrible name. Obviously in hindsight they recognized that too and they spun it out into their own company. In 2012 they raised one and a half million dollars in seed funding and in 2014 they launched the product commercially. So available to everyone and I don't really know if it was a massive hit from the get go. There wasn't a whole lot of numbers from like those first early years, but I imagine having Wix as a customer early on was helpful in establishing credibility when going out to other businesses and trying to sell. Anyways, by. By 2017 Monday and I. Sorry, I mean the Pulse had gotten off to a pretty good three year start. They had raised more money, so I'm assuming that there was some momentum behind the business. However, people were making fun of the name constantly. Maybe that's not too surprising looking back on it, but there was quite a lot of confusion around what the platform actually did and apparently people thought it was a rapper online. They thought Dub Pulse was a rapper.
- [13:34]
Brett Schaefer
That sounds. Yeah, that's surprising.
- [13:37]
Ryan Henderson
Yeah. They, after much criticism decided to change the name to Monday.com in 2017. They've had, or they had several funding rounds after that reaching. I think the furthest they reached was a series D in 2019. Not, not the worst. We've seen. We've seen some companies come public that had like Series F, Series G, which Series D is kind of, I think sort of the standard blueprint of VC funding until you decide to go public and they went public in 2021. Really good timing there. Obviously looking back on it, $7.6 billion valuation was their, I guess market cap when they went public and they raised $547 million in the process. They never really burned money because they used so much stock as a lever for compensation. Pretty much all of the money they accumulated over the funding rounds still sits on the balance sheet today. They because they've been free cash flow positive and use so much Stock, as I mentioned, as their sort of compensation lever.
- [14:49]
Brett Schaefer
It seems like a pretty straightforward history as our type of listeners will probably pick up on and I think they would agree with us. There is a tug and pull from the value investor types that would go, hey, you are profitable now. Let's maybe pay some people in cash or take this massive cash you have in the balance sheet and start repurchasing stock. We don't want 10% dilution in perpetuity. That's going to ruin our returns. But we'll get to that in the valuation section. Let's talk about what Monday.com actually is. I personally used it once at a, when I worked at a science laboratory and as you're going to get into, we used to have just, hey, why don't you do this? Why don't you do this? Someone just messaging you, emailing you. And then one day I showed up and I asked my manager, hey, what do you want me to do today? And he just points at the computer and goes Monday.com. and I think that explains it. You, you get your tasks and then you get to say the progress on those tasks. Is that, is that correct?
- [15:57]
Ryan Henderson
Yeah, basically, I mean, task management software, most people probably use something that is like this or they've tried to build their own solution. Basically it's a way of keeping track of everything that you need to do, you have done. It's a system of record. It's a great, great way to monitor what, where people are at on various projects. And so that core functionality, like the core purpose that it serves, is not novel. Monday certainly did not invent the task management industry, but they sort of put a different spin on it and we're able to attract customers by making it very user friendly. So it's not really easy to describe the user interface or user experience of a software product over a podcast, but I'll go ahead and give it a try. Basically, if you're a Monday.com user, the platform allows you to create tasks, assign those tasks, monitor the progress, communicate about them. So Brett, sharing the screen here for those that want to want a visual. But it's basically that, that is the basics like monitoring progress of tasks throughout various different departments within an organization. The biggest difference when you look at Monday versus other task management tools in my opinion is that Monday is a lot more visually appealing. So, and it seems simple, like, I mean, so what? The colors look a little different, but it's very like building blocks, drag and drop type of task management as opposed to like it's Low code, no code environment. So there's no. You can customize it as much as you want without having to create any code. And it is just very, very intuitive. And so this was like. And that's a big part of it was it was so intuitive that you could just automatically subscribe, get started. It did not require a lot of like there weren't much barriers to getting started here. You didn't have to get acclimated for a month. Get to know the software is very simple and that allowed it to scale quickly especially with small businesses and the like small teams within an organization. So like if you're carving out a team to do like an individual project, they need their own task management software. For some reason they would adopt money.com and then pretty quickly it would spread within an organization because people liked it. I think it's simple to simple enough to say they just built a better mousetrap. They built better, cleaner, more intuitive task management software. And it really is. It's not like the core work operating system task management product that Monday offers can be applied to pretty much any department. So right now 2% of their customer base uses it for HR, 47% uses it to manage their clients, 14% for finance management, 21% use it as a ticketing system. Actually might have even got the HR figure wrong. I might have accidentally deleted it. But basically it's really widespread. It's not like it's only used for a single department. That is the core product and that is 90% of revenue. Now what Monday.com has been trying to do over the last few years is leverage the core tech that they've built and repurpose it for specific verticals and obviously add kind of specific features that are designed for those verticals. So think they've done this with Monday CRM Monday Dev. Most recently this year they added Monday Service and Monday CRM for example. I think you can assume what it is by the name but it's designed for sales teams. It's customer relationship management platform launched in late 2020 and recently crossed $100 million in arrow. It's still growing quickly. Accounts are growing 61% year over year and it's just highly focused on CRMs for small to mid sized customers. Salesforce is obviously kind of the juggernaut in that industry when it's especially on the enterprise side. But Monday.com has done a good job building this out for small and mid sized businesses. The second product there that I mentioned was Monday Dev. This was launched in late 2022 and it doesn't seem like it's been super successful really. I think it was at like 15 million ARR. So it's been.
- [20:33]
Brett Schaefer
They don't really have. They're not very strong with development, software development, technical community.
- [20:39]
Ryan Henderson
Yeah, I mean maybe on the small, the mid sized business side development teams have just used the core product as opposed to signing up for Monday dev. But when you talk about like enterprise level development teams when they're assigning tasks and building new features they primarily use Jira from Atlassian is kind of the elephant in the room and then the other. There's tons of other competitors in that space. Linear is one that's very popular. I think Microsoft has 1. Microsoft DevOps but basically yeah it's. That has not really been the department or focus or at least has not been the early adopters from what I've seen. But yeah, Money dev, they're trying to cross sell it. We'll see. It's been the slowest to scale so far of all the products and the last one is Monday service. So this was launched in early 2025. It's their ticketing management platform for customer support, HR requests, internal tickets and this has been their fastest growing product in their history. They're at just $7 million in ARR but accounts are growing 45% quarter over quarter. And then really the gist of it is that 90% of the business still that core work operating System and now 10% of the business is these other vertical specific products and they continue to layer on AI capabilities to their various services which I like. I think that's where I have found the most value in AI is when it's like a platform I'm already using and it just cuts out some of the boring parts of using the platform. So they're trying to cross sell these. I have some doubts about their abilities to do that frankly. Like if you right now 6% of their customers use two or more products and they think they can get that to 40% but if I like and they're also moving up market so if I'm a big enterprise let's take, I don't know, a big bank.
- [22:55]
Brett Schaefer
They use Jira and all they're pretty locked into from what I can tell as someone who works for them with the Atlassian products and Salesforce products. Right.
- [23:06]
Ryan Henderson
And even if, yeah, that's what I was going to say is if you've got, even if you adopt money.com for some task management or some department, say you use it for finance, it's not Easy to go. Hey, you know our finance department department uses us. Let's get your whole sales team to rip and replace Salesforce and switch to Monday.com. i don't think that cross sell is as easy as it set as they make it seem in their slide decks. So I have some skepticism that they're going to be able to do that very well. Honestly. Here's a question for you. Will Bitcoin's price be above $105,000 by the end of 2025? IBKR forecast trader yes was recently at 14 and no was at 86%. With interactive brokers forecast contracts you can trade on future events like climate change, the economy or politics. You choose yes or no and if you're right, you get paid. It's that simple. Explore trending data, spot the trends and make your prediction for December 2025. Trade forecast contracts at Interactive Brokers and earn a dollar for every correct prediction. Plus you'll earn over 3% APY on your investment with an interest like incentive coupon and you'll get $3 just for signing up with Forecast Trader which you can use for any purpose. Forecast contracts are not suitable for all investors. Go to ibkr.com forecast and start predicting today. Last trading day for this contract is December 31, 2025.
- [24:37]
Brett Schaefer
Yeah, it makes sense and I think I agree with you. It's hard to just rip and replace, you know, hey, oh we got equivalent product but it's like well these other companies not only have the equivalent product but are generally at a larger scale now maybe with the small and mid sized customers like for example, I'm not sure if Fiscal AI is a customer of Monday.com but a company in that size maybe would be more, depending on what type of company it is more adept to. Oh, we don't have a CRM solution. Maybe we'll try Monday.com CRM. Oh we don't have. What is this one? That's growing quickly. Monday service. We don't have a ticketing system for customer support. Internal tickets. We kind of need to build one. Hey, why don't we use money.com because we already use that service. But going mainstream. Yeah, it's not going to be the size of Salesforce anytime soon now. They don't need to be though. Right? Because this is a huge market. They're only doing a billion ish in revenue. I mean you have the sales forces of the world, I think pushing actually don't know, maybe 40 billion in revenue. You can correct me if I'm wrong. Yeah, Something like that. So let's get into the competition. Unless you have anything more on the business. Who, as you analyze this company, analyze the space, who do you think they're competing with? What are their biggest threats? What do you see as any their edge or moat in the industry? Take us through the competitive landscape.
- [26:05]
Ryan Henderson
Yeah. The 10,000 pound gorilla in the room is Atlassian. Like exclude Salesforce. Like I'm just talking about the core task management. It's Jira atlassian Atlassian does five and a half billion dollars in revenue. So five times roughly the size of Monday.com, but then now depending on which product you look at. Because obviously there's Dev Task management, there's CRM competitors, there's ticketing competitors. If you just kind of look across the board, it's a crowded room. So Jira, which is owned by Atlassian Trello, also owned by Atlassian Asana, ClickUp, Linear Smartsheet, HubSpot, which is like a competitor on the CRM side. Airtable notion. The list goes on and on. It is a crowded space but they have, it was the same case 10 years ago. Task management was super competitive even when they started and especially 2016, 2017 all the way through it's been a competitive space and they've still been able to carve out their own customer base and market share and, and from what I understand certain companies like certain products for different reasons. So it's not like one of these is the catch all that's way better than everything else. It's like if you look up top 10 task management software tools, you're going to get endless lists and each one's going to have various pros and cons features designed for specific industries, specific sized companies. But money.com has one customers by I think kind of what we talked about being one of the most intuitive, easy to use solutions and allowing it to kind of scale within organizations. Now it's becoming more of an enterprise sales business. Like they're really building out their sales team and going after these enterprise customers. But the one thing that I like is that they are in a stronger position now than most of their competitors other than Atlassian. They have more revenue, more money on the balance sheet. VC funding I imagine has dried up a bit for these task management tools given how crowded it is.
- [28:28]
Brett Schaefer
Like there was a way, unless it's some AI spin, right. It's probably not going to be the same as it used to be.
- [28:36]
Ryan Henderson
Yeah, I mean there was, people said that money.com was like a part of the last Wave of workflow software VC rounds where from I think probably 2005 to like 2015. This was the craze. Like software is going to eat the world back. Every task management platform that you can because it's going to be just make every business's life easier. And now it's obviously very very crowded but I think they're going to be able to press their advantage. They've got enough employees to continue to build out the product. They can iterate on it with AI enhancements, they can build vertical specific tools, try to cross sell. There's some advantages now that they have weirdly enough being only a $6 to $8 billion company, they're one of the bigger ones especially relative to a lot of their privately held competitors. So I like where they're at. There's no moat per se. Like I don't think there's this massive moat but there's, there are significant switching costs. So big advantage there. We'll talk about that a little in a little bit. But you gotta get the customers, that's the hard part. Once you have em, they'll stay.
- [29:55]
Brett Schaefer
Okay, let's talk financials. I think we're gonna get through the valuation. Take us through how you analyze a software company. As I'm looking at some of these charts, it's Almost the stereotypical 2019-2025 story where very unprofitable investors get upset, we get to break even, slash kind of profitability. And in the last few quarters it's been stuck on the margin expansion story. Take us through what's happening and how you're analyzing and valuing this type of business.
- [30:31]
Ryan Henderson
Yeah, I talked a bit about it at the top of the episode. But just to summarize, money.com has grown revenue very quickly over the last five years and they've improved profit margins as they've scaled. But let's actually go through the whole P and L and just kind of talk through I guess the unit economics, so to speak. This is last quarter's view. Last 12 months are a little different, but not, not too different. So $317 million in revenue. They spend 36 million of that on cost of revenue. So cost of goods sold, I assume that's primarily cloud computing costs, credit card networks, payments, all those wide moat businesses that sit in the cost of goods sold line for every software company out there. So 89% gross margins then they spend 25% of their revenue on research and development, 12% on general and administrative and 52% on sales and marketing. So sales and Marketing, by far the largest operating expense contributor.
- [31:42]
Brett Schaefer
That's what we're looking at for operating leverage. That's the number one concern now. I guess you're going to get into it, but how fast are they growing with all this sales and marketing spend? Is that anything that concerned you? Like, all right, we're spending half of our revenue on sales and marketing. And how fast are they currently growing?
- [32:03]
Ryan Henderson
Yeah, yeah, I'll get into it in a sec. The only thing worth mentioning there is if you deduct all those, all the cost goods sold, all the operating expenses, you get to basically break even. Minus 1% operating margins. Although they have 170, sorry, 1.7 billion in cash and investments on the balance sheet. So they earn $16 million in interest income. So their net margins are like 4%. So. Which at the moment is like, it's kind of just sitting there, which is. I'm okay with that, I think collecting interest. And they've said that they've authorized a buyback, so it's available now. I would have been a. They didn't really have any need to authorize a buyback over the last three years, four years because the stock was pretty expensive, but they've now authorized one. The valuation has come down quite a bit. So they can use that cash if they choose to, or they can continue to collect interest on it, but that is the operating margins and the net margins have improved drastically. So December 2020, negative 94%. I mean, they were hemorrhaging money today. Positive 6%. Positive 4%. Roughly. So and it's been just this constant evolution and sort of feels like they're kind of choosing their profit margins or they have been, or their burn rate, I should say. But the bulk of that margin improvement has come from deleveraging in their sales and marketing line. All the numbers I just mentioned, they were all gap figures. So I include stock based compensation. Management typically does not include SBC in their profitability metrics. And this is maybe my biggest frustration looking at management is they just seem to own like they obviously know it exists. They authorized a share buyback to offset dilution. So they know it exists, but they, they spend, get ready for this. 14% of their revenue and stock based compensation. That is really high.
- [34:17]
Brett Schaefer
Yeah, it's high. Yeah. They, it's frustrating knowing that not only are the finance teams on this at these companies smart, they have to be smart, at least smart enough to understand this. It's not rocket science. The executives are smart enough to get a five minute lecture to understand the basics of shared dilution and how that all can affect your overall, you know, stock market or just overall earnings per share trajectory over the long term. And yet they seem to just pretend that either it doesn't exist or that it doesn't matter or that they don't understand, like, oh, this is just an adjusted thing. We're going to offset it with dilution. It's like you're not understanding how this works whatsoever. Which can be frustrating because it's either one, they're not actually as smart as they seem, or two, they're purposefully being ignorant of the underlying financial reality of how an income statement works.
- [35:18]
Ryan Henderson
Or three, the third option there is they think they have a massive market to go after. And this is maybe it's a mix of their people, right? Which I think where companies get caught off guard is when they overestimate what they can grow at. And all those investments in their people and giving all this equity to their employees, all of a sudden they thought they were a small organization that was going to be much larger. So give them stock, incentivize the employees, and all of a sudden that's kind of grinds to a halt. And it kind of has this backwards effect where all of a sudden employees, their RSUs are not worth what they thought it would be worth. It's probably a little demoralizing, but there's no question that they spend a lot of money. However, as we outlined at the start of the episode, they have a much higher capacity to earn today than they had five years ago. And much of that is likely because they spent so much like hiring all those employees, building out the product, evolving it over the years, marketing it being the first ones that show up when you look up dev, task management software, whatever on Google, the expensive sales team.
- [36:38]
Brett Schaefer
Sales commissions, those aren't cheap.
- [36:39]
Ryan Henderson
Employees building a huge headquarters in Israel, it's like, these are costs, these are real costs, but they're probably larger today because of it. And that is the whole game with software. High fixed costs, very little marginal costs. In theory, they could be very profitable if they decided to cut spending. The question then becomes, how sticky are the customers? Because are you on an expense treadmill where you can't cut expenses because you have to keep improving to serve those customers? If it's really sticky software, then I would argue it's okay for you to slow that spending and you can continue to value them on sort of theoretical earnings. From what I can tell at the enterprise level, this product is very, very sticky. So Brett's sharing a chart here. But the enterprise net revenue retention rate. And by enterprise, I'm just saying customers that spend more than $50,000 with Monday.com that customer cohort has a 117% net revenue retention rate, meaning they spend 17% more with Monday.com every year. Now keep in mind gross retention. If you look at the whole customer base with money.com, it's going to be there's going to be some churn because companies go out of business, especially small mid sized businesses and maybe they can't afford software. So there's going to be some churn at that level. But with the enterprise, yes, I think it is very, very sticky. And I said earlier that I don't necessarily buy the whole cross sell story here, but that is referring to those vertical specific products. The core platform I think really can become like pervasive across different departments. So there is kind of not necessarily the cross sell, but it spreads within its existing customers. And I found a write up that kind of lays this out well in terms of the stickiness. He says Monday.com gets increasingly entrenched with growing adoption within their customers due to prohibitively high switching costs. Around 1, transitioning data out of Monday.com into a new product with its own data schema, which often requires high budget consulting teams to execute. 2 Rebuilding all of the processes in Monday.com from scratch in any replacement product, requiring an org wide rebuilding distraction given adoption across departments. And then three time sensitive change management involved in procuring, implementing and training an entire employee base on a new alternative product. It's sticky at the enterprise level if multiple departments use this. I would be, I imagine churn is extremely low.
- [39:27]
Brett Schaefer
Yeah, I agree it's not going to be as sticky as a database management system or just your database, but it's definitely got some switching costs. Just imagine again when anyone, any listener or anyone that's trying to envision what switching costs actually mean. Just think of you were the cto, chief technical officer or maybe chief CEO. I don't know who would be in charge of this. At any company you have to manage a team of 200 people and you go let's take money.com which been using for three years and we're just going to try to switch to an equivalent product. How many employee hours would need to be spent doing that and the total cost and whether at the end of the day it's actually going to save you any money. So yeah, that's where the switching costs show up and that's where the incremental not only cross sells. But over time the pricing power shows up. Everyone hates Oracle. That's what they say. It's kind of like the cable companies. People have this reputation, oh I hate Oracle. But they're able to raise prices all the time. Churn stays pretty low. The SaaS companies, excuse me, are not all the same in this regard. But that general switching cost allows you to incrementally raise prices, add on new revenue without significant churn. As long as you as money.com has a product that people enjoy and that saves them time.
- [40:57]
Ryan Henderson
Yeah, the product would have to suck for you to for an enterprise to change task management platforms because like I'm thinking about it, with Fiscal AI we have a task management platform for the dev team. There is so much stored in that it's such a wide system of records, so many tasks out there that it would be just an absolute pain to go out and try to switch. It might be. It's gonna it definitely is different at the S and B, small midsize business level, but enterprise, which now accounts for I think 40% of Monday.com's business and is an ever growing piece of the pie. I think this is incredibly sticky.
- [41:38]
Brett Schaefer
If you regularly listen to chit chat stocks then we know you love analyzing individual companies. We do too. That is why I, Brett Schaefer, co host of the show, decided to start writing the Emerging Moats stock research service. Emerging Moats produces regular stock research reports on companies with emerging competitive advantages, regular updates on stocks I own and on my watch list, and has full transparency to my portfolio transactions and returns. I cover under the radar Emerging Moat companies with prior research reports on Oscar Health, Kraken Robotics, the Real Brokerage, and much more. Emails will be sent out on a weekly basis. Explore the service today and find your next great stock by going to emerging moats.com the link will be in the show Notes.
- [42:21]
Ryan Henderson
All right folks, before we move on we need to tell you where we get our data. Fiscal AI Fiscal AI is the complete stock research platform for fundamental investors. I use the platform pretty much every single day. You'll see the charts in our podcast, you'll see it in our newsletter. This is our one stop shop for stock research. They've got up to 20 years of financial data on all companies globally, including the largest company specific segment and KPI data set on the Internet. That includes metrics like Duolingo's Daily Active users, Oracle's backlog, Rocket Labs, revenue per launch, and literally millions more data points. They've also got earnings call transcripts, ownership data Equity research reports and much much more. If you want complete financial data at your fingertips, you need to check out Fiscal AI. And if you use our link Fiscal AI chitchat, you will automatically get two weeks of Fiscal Pro for free. No card required. If you you want to upgrade, our link will also get you 15% off. Again that's fiscal AI chitchat. The link will be in our show notes.
- [43:25]
Brett Schaefer
Okay, let's talk AI. One is AI why Monday.com stock is down and two is AI and AI led software a legitimate threat to Monday.com niche.
- [43:42]
Ryan Henderson
So I think this is one of the reasons why Monday.com stock has sold off and it genuinely makes no sense to me. But Brett requested that for my research for this episode. I, a completely non technical person try to build a competitor to Monday.com using AI. Now I maybe I used the wrong AI. Maybe there's better tools for this but here's the problem.
- [44:11]
Brett Schaefer
Yeah, I think there is others but your example here is going to prove a point.
- [44:15]
Ryan Henderson
Yeah, here's the prompt I gave Gemini make me a task management software system that resembles money.com I need it to be able to work across multiple users. I want you to actually spin up a website for me. Now I'm sure there's devs listening to this that think that is the dumbest prompt they've ever heard. It probably is. The response was that is a fantastic hands on goal. While I am an AI and cannot directly access web hosting services like AWS to physically spin up live website with custom code I can absolutely guide you to the fastest most powerful way to launch a live multi user system that mimics the structure and functionality of money.com and it gave this long response that I, I had no idea what to do with because I am non technical. So lucky for Monday.com they will not be having a new competitor in the space today because I have no clue what to do with that answer. However, back to the original question. I honestly think this narrative that someone can just spin up a Monday.com competitor and by someone I mean someone more credible than me. Like a literal developer can go I'm going to spin up a money.com competitor right now.
- [45:33]
Brett Schaefer
CTO working in a hundred person team.
- [45:36]
Ryan Henderson
Yeah, yeah. So there, I mean there's that there's the building internal tool which we can talk about in a second but there's also the like new guy wants to start it up, new guy in the block type of thing. I think that's one of the dumbest things I've ever heard if you've ever worked in software, you know that building a capable platform with product, just even product parity, which would require a lot, it's like the tip of the iceberg for building a real business. There's so many edge cases, there's endless customization requirements, there's integrations with third parties. You have to have a lot of these integrations with third parties. And to serve enterprise customers you have to have the physical architecture to do it. You need to be SOC 2 compliant, which apparently is a huge fiscal had to go through this.
- [46:26]
Brett Schaefer
What does this SOC do?
- [46:28]
Ryan Henderson
Yeah, it's like software compliance standards and like Gap.
- [46:32]
Brett Schaefer
Like gap almost auditing like. Or is it different?
- [46:38]
Ryan Henderson
It's more like if I'm a CTO or if I'm working at a big enterprise company, I can't even buy software from a vendor that isn't SOC 2 compliant.
- [46:47]
Brett Schaefer
So almost like getting government clearance, Defense Department clearance, something like that. Yeah, yeah.
- [46:53]
Ryan Henderson
Which is a lift. It's a lift to get SOC 2 compliance. It's not as easy as it might sound. And perhaps more than anything else, you actually have to go out and get customers, which is not. I think people think there's this world in software where you build it and they will come. And that is not even anywhere near reality when it comes to enterprise software. Monday.com releases a new version of its platform every single day. So however fast you think that solo dev is iterating on his task management system, I promise Money.com is doing the same thing. Now the other question is, does AI make it easier for savvy enterprise customers to build a tool like this in house? Yeah, it probably does. But again, I think it comes down to focus. Let's take Canva for example, who's a big Monday.com customer. Could they devote some developers to working on building an internal task management platform? Yes, but that's not their core business. That wouldn't drive revenue for them. It'd be a waste of the developers time in my opinion. It would be a distraction and then they'd have to maintain it. And even if they did maintain it, it probably still wouldn't be as good as just buying from a provider directly. So yes, they'd save some costs, but then allocating a bunch of devs to it, are you really saving costs?
- [48:19]
Brett Schaefer
All right, I agree. I agree. Where I've talked to people that work at Amazon and they are a large enough business and I think the big tech companies are the ones that generally build their own internal tools where they say, oh, we have the slack, but it's our own internal one. Or say we have this software tool that you've heard of, but we built our own internal one. But almost every other company of a decent size is not going to be doing that. For example, the company I work at, Motley fool, is pretty large. It's larger than most listeners would think. And they're using a lot of these enterprise software tools to manage a large, globally distributed organization that would be quite difficult without them. And are they using money.com? no, they're using one of their competitors. But it's a good example of if the Motley fool, who has probably a very sharp technical team, they have to have very, very secure systems. Given that, you know, you don't want to leak any of the recommendations, all that stuff. They're not going to spend their time building task management. They'd rather pay someone like atlassian, whatever it is, 100, 200, $300,000 a year.
- [49:25]
Ryan Henderson
Yeah. At the like, on the absolute behemoth level company size, it makes sense to build internally because you can develop or you can throw a hundred devs at it.
- [49:37]
Brett Schaefer
And that was true before AI.
- [49:39]
Ryan Henderson
Yeah, yeah. And maybe it helps them do that a little better. But I still think for the majority of enterprise customers, it makes more sense for them to focus on their own product than to build a task management system themselves. In house that tries to mirror Monday.com let's Talk Management and valuation. The valuation stuff is probably the most important, I think what people care about the most, but management real quickly. We talked about them at the top of the episode briefly. The company is led by two CO CEOs that were both originally technical, meaning they could write code themselves. They could and did. So so far they've built a great product and they've scaled the business really quickly in a hyper competitive industry. And so you kind of have to give them kudos for that. And in terms of having an eye for product, they pass the test as managers. They're also both really large shareholders, so there's some incentive alignment there. Roy Mann owns 9.8% of the company and Eran Zinman owns 3.6%. The next largest solo shareholder is the CEO of Wix, actually Avishai Abrahami. But Roy Mann has the sole founder's share, which gives him special veto power over basically any big decision at the company. So I think even if you got an activist in there, ultimately you can apply pressure on executives in a lot of ways. And a founder's share doesn't like it's not like he can never be removed or anything like that. Maybe it, maybe it is. But if you apply enough pressure that changes can be made is kind of what I've witnessed. Especially if like everyone at the organization is pissed off about the stock. So so far this hasn't been a huge deal, this whole founders share thing, but it's out there. Just know Roy Mann has a lot of power here. As for compensation, since Monday.com is internationally listed or an international company listed in the US they don't have to have like your standard proxy statement. So you don't actually know what the KPI hurdles are to get their bonuses. But the whole executive team got paid 31 million last year. It's on a 1.2 billion, $1 billion revenue business, 2% of revenue.
- [52:14]
Brett Schaefer
Yeah, it's pretty sizable.
- [52:16]
Ryan Henderson
Yeah, it's high. It's not a deal breaker. I was bummed that I didn't actually know what the bonus hurdles were. I was a little upset by that. But I would love for them to publicize that information. In general, I like what they've done. I think they've built a really good business. But I think we're about to find out what kind of leaders they actually are. Because the Stock is down 64%, they're trading at their cheapest multiples. Cheapest multiple ever. Basically. Investors are losing faith in the company and you can feel the pressure on them in some of the conference calls. And this, you really saw it. If you go read the last conference call, it starts off with the some analyst throwing out a softball question about some new product and how it's going to improve their tam. And the CEO is like, well, first I just wanted to say I just want to congratulate you on your retirement. To the analysts like they're best buddies and they like, it's a few great questions and talking about the product and how innovative it is. And then an analyst that really cares is like, why is growth slowing? Why aren't you raising guidance? This is the first time in your history you haven't raised revenue guidance. And all of a sudden you started to see, I think, more cracks in the answers. And for a long time they, I feel like they followed basically the classic tech CEO playbook, which is you hire out the operational and financial roles and you just focus on building the best product. In my experience as an investor, seen a lot of IPOs like that over the last five years, especially coming out of that Covid period. Those situations rarely last. The CEO is not the CTO and having founders be the CEO when all they want to do is build cool tech just doesn't work. It works when times are good, but then shareholders are calling to get rid of them when times are bad. And they typically end up taking some other role when the stock plummets. Semrush just had this like, our CEO is moving on to executive chairman. And here comes in this operational guy. And either you move to a more technical role or you evolve as a CEO. A good example of someone who went from technical to, well, evolved CEO is Mark Zuckerberg. Like, he was obviously technical in the early days. Anyone that's watched that movie knows. But he's evolved. He has his hands on pretty much the whole business. I doubt he's writing code these days, but there are, there are examples of technical founders that have evolved. Well, I think another good example of someone who maybe succumbed to the pressure a bit was Toby Lutke of Shopify, who builds a great business. Stock dropped 60% in May of 2023. He steps into the executive chairman role, lets someone else take the pressure.
- [55:10]
Brett Schaefer
I think it might have dropped 80%, but either way, he was almost forced, not unwillingly, but it didn't seem like he was very excited about not doing his crypto projects anymore. One thing I note is that even the hurdle for being decent at capital allocation, spending discipline, capital returns, that the like is not that high for companies of these qualities, these high gross margins, because you look at Facebook or Meta and you look at its capital return strategy over the last five years, it's, it's pretty horrendous in hindsight, given their timing of their buybacks and at the same time, money, if money.com did something like that, that would be a big improvement for what they're doing right now.
- [56:03]
Ryan Henderson
Yeah, it's there, there's kind of some give and take and it's, it's frustrating sometimes looking at management teams that have these technical founders that are so like avid about the product, spend, spend, spend. Like, we've got a huge tam, we can expand it, we can do all this, but at the same time, you wouldn't have this organization without them. So they have built a great business. And it's not like I'm calling for them to resign or anything like that, but I see it a lot where you get this mounting pressure from shareholders. And all of a sudden the guy who just wanted to build a cool business, build cool technology, doesn't really like what he's doing anymore and decides to step into a new role. Maybe they Continue to have their stake. They're not selling it necessarily, but they just don't want the pressure. I could see that end up being the case. Or maybe this co CEO structure works out and they come out of this even better. We'll see. Let's Talk valuation though. Monday.com has a market cap of $8.2 billion right now. This is actually why I wanted to do the episode was it was trading at its lowest valuation ever. They've got $1.3, $1.4 billion in net cash. Kind of depends how you define it. But enterprise value roughly is actually 6.8 billion as of this recording. So 6.8 billion. That puts them at an enterprise value to free cash flow multiple trailing of 19 times, which is like I said, near their lowest multiple ever. Free cash flow is kind of a BS metric for them right now because they've got all that stock based compensation. So don't just take that at face value. We gotta actually do a little bit of modeling here that I love when companies basically force me to do modeling because they have this huge SBC line. But management is targeting $1.8 billion in revenue for 2027. For 2025 right now we're looking at just under 1.3. So they're basically guiding for just over 20% annual revenue growth. They are targeting 20 to 25% long term non GAAP operating margins. I don't know what long term means. I think that kind of resonates with the 2027, 2028 years. So we got to do some guesswork on what their actual operating margin or more. So what I'm looking at is free cash flow minus stock based compensation margins. And I think I've gotten to some comfortable figures here. I could be off, probably will be off. But I'll go through some of my assumptions. Basically, if they hit those growth figures that they estimated, I think stock based compensation as a percentage of revenue will moderate from 14% currently to around 10%. I hope even lower in the long run. But that's my assumption for 2027. And I believe free cash flow margins can go from the current 26% to, to around 30 more than 30%. I don't see any reason why they can't get to 40% free cash flow margins in the long run if they keep hitting these revenue growth estimates. So I don't want to bore people with numbers. But basically I, I assume here that it's 21% revenue growth this next year, 20% and then it kind of moderates. So I think I've explained this before anyone who's new, what I try to do is I'm just trying to find how much will this company have in real earnings five years from now. I basically temper revenue growth estimates from 21% down to 15% by 2030. Obviously once you kind of get two, three years out, it's hard to really guess what revenue growth is going to look like. You don't know what products they're going to launch or anything like that. And then I expect that free cash flow margin by 2030 is 33% SBC as a percentage of revenue, 7% that gets free cash flow minus SBC margin. That figure that I'm looking for to I believe it's 26%. But even whatever, give or take, the ending numbers that I end up with here are 2.6 billion, 2.7 billion in revenue in 2030 versus so basically a double from today and $692 million in free cash flow minus stock based comp. At today's enterprise value, it's trading at 9.8 times my estimate of 2030 earnings. So it's not as cheap as people might think. I've said this before, but basically what I want is I want the stock to trade at less than 10 times my estimate of 5 year out earnings. And this just barely makes the cutoff like as close as it can be. So I'll leave it there. What do you think of my valuation numbers? I know I threw a lot at listeners there.
- [61:08]
Brett Schaefer
I think it makes general sense. Yeah, you have. The margin is attainable, especially with those SBC figures. I think the revenue growth figure, given that they're not that big, big feels quite reasonable and they've executed really, really phenomenally with their growth over the last five years. I would expect that to continue. I see no reason for that to slow down. Looking at that valuation, the one thing I note is okay, like it's 10, maybe 10 times 2030 earnings right now. Probably do decent if these assumptions work out. But I would tell management if you optimize your SBC and the buyback, the stock will be twice as high in 2030. So anyone listening to this, just have that in mind. Would you like your shares to be twice as valuable by 2030 or not? And maybe just work back to how you can get there with this SPC dilution versus the cash on the balance sheet, the buyback and all the cash flow coming in each year from, as Ryan mentioned, a subscription. Well, maybe not all subscription, but a recurring revenue software business with Minimal churn, high switching costs and high net revenue retention. I think we all want the stock price to be higher if you're a shareholder. And that's my little rant to end things. Now we're going to end Ryan with whether you're buying shares. How are you? Is this watch list Sell buy starter position. What's going on with money.comstock in your own portfolio?
- [62:45]
Ryan Henderson
So as I mentioned, this does barely meet my cutoff and I, I did not work back from that figure. Just to be clear. I, I got to my guess of what earnings could be and then I saw what is it as a percentage of today's current enterprise value and it was right where I want it to be. Well, sorry, right below what I find acceptable. I think I'm going to take a starter position. It is not crazy cheap here people you like. What happens with the SBC line is very important here. That's going to make probably one of the biggest differences obviously besides kind of top line growth. So I really like the product they seem to do. Like I think some people just picture every SaaS company looks like money.com, which there is. A lot of. A lot of SaaS companies do look similar. But look at Asana and look at Monday.com's revenue trajectories. Monday.com is winning market share in this industry and I think a lot of it comes down to just having a very intuitive customizable product. So I think the business could surprise to the upside in terms of new customer adoption. Management does kind of piss me off. I'll be honest. The SBC stuff gets to me. It's frustrating. But if they keep generating more than a 110% dollar based net revenue retention rate across their entire customer base, I can just deal with it. It's hard for me to imagine the business not doing well when they are growing 10 to 15% from their existing customers. So I'll end it there. I like it going to take a starter position. The things I'm watching are stock based comp management commentary about it and are they basically what's adoption look like across the other products? I want high net revenue retention rate, low SBC as a percentage of revenue. Those are like the two metrics I would like.
- [64:51]
Brett Schaefer
All right, let's close things out here. I'll hit the disclosure and we can get out of here. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guests may hold securities discussed in this podcast may have held them in the past and may buy, sell or hold them in the future. Thank you everyone for tuning in. Hope you understand the money.com business today and we'll see you next time.
- [65:35]
Ryan Henderson
And Doug, here we have the Limu Emu in its natural habitat, helping people customize their car insurance and save hundreds with Liberty Mutual. Fascinating. It's accompanied by his natural ally, Doug. Uh, Limu is that guy with the binoculars watching us? Cut the camera. They see us. Only pay for what you need@liberty mutual.com Liberty Liberty Liberty Liberty Savings Ferry Unwritten by Liberty Mutual Insurance Company and affiliates Excludes Massachusetts the holidays mean more travel, more shopping, more time online and more personal info and more places that could explore expose you more to identity theft. But LifeLock monitors millions of data points per second. If your identity is stolen, our US based restoration specialists will fix it, guaranteed your money back. Don't face drained accounts, fraudulent loans or financial losses alone. Get more holiday fun and less holiday worry with LifeLock. Save up to 40% your first year. Visit LifeLock.com podcast terms apply.