Monday.com Stock Is Crashing. Time to Buy the Dip?

Shares of work management software provider Monday.com (NASDAQ: MNDY) are getting pummeled yet again following a quarterly earnings report that slightly missed the mark. In August, the stock fell off a cliff when its outlook for the third quarter was a bit light. This time around, Monday.com slightly cut the high end of its full-year revenue guidance range in a Monday release of results, prompting a major sell-off on Monday morning.

Monday.com stock entered the week down nearly 20% for the year, and down more than 40% from its 52-week high. Monday's losses will add to those tallies.

Is this post-earnings decline a buying opportunity? Or should investors think twice about Monday.com?

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Moving upmarket and expanding the product portfolio

Monday.com's third-quarter results looked great overall. Revenue surged 26% year over year to $316.9 million, adjusted earnings per share jumped 36% to $1.16, and the net dollar retention rate held steady in expansion territory at 111%.

The company's expansion strategy has been to launch new products while targeting larger customers, and that plan appears to be working well. New products beyond the core work management platform now account for more than 10% of annual recurring revenue. These include Monday CRM, Monday dev, Monday service, and Monday campaigns. Monday.com is gaining traction with Monday campaigns, and an email marketing platform that launched in September. The product already has over 200 accounts.

These new products are contributing to Monday.com's stellar growth among larger customers. The company ended the third quarter with 1,603 customers spending at least $100,000 annually, up 48% year over year. Monday.com also had 78 customers spending at least $500,000 annually, up 73% from the prior-year period. Large customers are expanding spending more quickly than the overall customer base, with a net dollar retention rate of 117% for the $100,000 annual spenders.

While Monday.com's third-quarter results didn't disappoint, its outlook wasn't as impressive. The company raised its full-year outlook for adjusted operating income and adjusted free cash flow, but it narrowed and lowered the high end of its outlook for revenue. The company now expects full-year revenue between $1.226 billion and $1.228 billion, down from a previous range of $1.224 billion to $1.229 billion.

The valuation could be a problem

One could certainly argue that Monday.com's revenue guidance cut is minor and shouldn't matter much, but given the stock's lofty valuation, any bad news has the potential to produce a steep decline.

With a market capitalization of around $8.4 billion as of late Monday morning, Monday.com stock trades for nearly 7 times revenue guidance and more than 40 times the average analyst estimate for full-year adjusted earnings per share. GAAP earnings per share are much lower than the adjusted figures, so the P/E ratio based on GAAP EPS is far higher.

Monday.com is growing revenue at a healthy pace, with new product launches helping the cause. However, given the backdrop of economic uncertainty, investors may be concerned about a potential slowdown. Monday.com's platform may be mission-critical for some customers, but it's not clear what will happen to customer retention if cost-cutting at businesses takes aim at non-critical software spending.

Is Monday.com stock a buy?

Monday.com has built a compelling software platform, and its growing assortment of products turbocharges its land-and-expand business model. The valuation is a sticking point, though. Trading for over 40 times forward adjusted earnings estimates, the stock is pricey even after a steep decline from its 52-week high.

At the right price, Monday.com could be a compelling investment. Right now, though, the valuation is tough to get behind.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Monday.com. The Motley Fool has a disclosure policy.