Why did MNDY perform better?

Investment Analysis Clubs Saul’s Investing Discussions
1

An interesting question was posted on this forum about MNDY’s stock price action over the past two weeks.

It was noted that from Sept 6th to Sept 9th, Monday.com’s stock rose from $110 to $130, which was an 18.7% gain. The next week, it followed up with another 2.3% rise, closing out Sept 16th at $133. This represented an impressive, two-week gain of 21.4%.

During this same timeframe, the market (SP 500 index) led investors on an up-down roller coaster ride resulting in a loss of 0.9%.

Now, there was no major news about the company during this period. No new product launches. No acquisitions or mergers. No analyst upgrades or downgrades. Nada.

So what gives?

Why did this stock perform so well, while the rest of the market did not?

I was not satisfied with the responses provided and I went digging for better answers.

Setting the context

As retail investing (and trading) increased over the last 2-3 years, interest in equity options trading exploded. It has more than doubled from about 4.4B contracts traded in 2019 to more than 9.4B contracts traded in 2021. 2022 YTD is keeping pace with that growth rate.

Last Friday, we had a major, quarterly options expiration, fondly known as triple witching. These events result in about $4-5T worth of options being sold, bought or set to expire during that week.

Options expirations are usually accompanied by increased volatility in markets, especially on the adjacent Thu and Fri.

MNDY has a small no. of shares outstanding (45M shares) as compared to other stocks such as DDOG (316M shares), CRWD (233M shares) and SNOW (320M shares).

Average daily shares trading volume for MNDY is about 682k shares. This is very low as compared to 4.6M shares traded daily in DDOG, 3.8M shares traded daily in CRWD and 7.7M shares for SNOW.

What played out last week

From Sept 6-9th, MNDY rose as tech-investor bullishness returned and markets gained 4%.

A total of 5,122 MNDY options contracts expired on Fri, Sept 16th, representing about 512,200 shares.

As these options expired, investors could take their profit/loss and walk away or re-invest them into new options dated into the future.

MNDY investors seem to be bullish and are betting that the stock will rise in the future. The put-to-call ratio by volume for MNDY is 0.54 which means that bullish investors bought 2 call options for every 1 bearish put option for the stock. In comparison, the put-to-call ratio for DDOG is 1.09, for CRWD is 0.88 and for SNOW is 1.31.

As investors buy call options, market makers (options trading institutions) sell those call options to them. So investors are in a bullish position, while market makers are in a bearish position for that stock, which is the other side of the trade.

Typically, market makers hedge their positions. In this case, they have to balance their bearish MNDY option position by going long the stock…buying an equivalent amount of MNDY shares. This allows them to maintain an overall neutral portfolio to minimize risk because they earn income from trading fees, not from the actual options themselves.

This sequence of events resulted in increased buying pressure for MNDY shares, especially towards the end of last week. On Thu itself, 2.1M shares were traded, representing about a 3x of average daily volume.

History repeats itself

In a nutshell, MNDY’s stock price stayed elevated as compared to the broader market and it’s high growth peers because of…

low share float, low average daily trading volume, high options trading volume, triple-witching options expiration event, high market volatility and a lower put-to-call ratio resulting in higher stock buying pressure.

This has happened to MNDY during previous triple-witching options expirations as well. Check out their stock chart during the weeks of March 18th and June 17th, 2022.

Bottomline

In today’s markets, share prices are driven by growing retail interest, computerized trading algorithms, meme stock trading mania, global brokerage services and so much more. Sometimes, the stock price is impacted by news about the company or an analyst upgrade or downgrade. During options expiration events, none of this might matter if we are dealing with a low-float stock like Monday.com.

Now, as to whether the stock is a buy or not at it’s current price, I don’t know. I would have to take a look at their latest earnings report to decide.

Beachman (Beachman.substack.com)

97 Likes
2

Thanks Beachman, that was useful and helpful, and better than any of the explanations that I was able to put together.
Saul

8 Likes
3

Monday just announced that they tripled the size of their North American Headquarters in NYC. This comes shortly after hugely expanding their European headquarters in London in May, after opening it just six months before in November. This does sound like a company that is doing well, business-wise :grinning:.

Best,

Saul

11 Likes
4

“This does sound like a company that is doing well, business-wise”

I am not sure that upsizing to a 110k sq feet office space in the prime Park Avenue South area of NYC is a sign that they are doing well as a business.

It seems more like a sign that they continue to spend with abandon ala the $5M Superbowl ad that did not have a perceptible, positive impact on their NA sales for the subsequent two quarters. Monday.com was not in the top 10 brands mentioned online after the Superbowl…it’s as if no one understood or even cared about what they are selling.

Perhaps there is a valid reason for all this office space. I don’t know how many US or NY based employees they have.

I would assume that they have a WFH policy that reduces the need for office space for every local employee. After all they sell Work OS software that allows remote teams to collaborate effectively with each other across geographies.

What I do know is:

  1. SG&A expenses are 96% of revenues in Q2 2022. This has been flat since Q2 2021 which was 95% of revenues.

  2. Capital will have been spent in the acquisition and furnishing of this new office. Property, Plant & Equipment which includes buildings, furniture etc rose 550%YoY in Q2 2022. With this NYC office, PPE will rise further, eroding cashflows and margins over time.

  3. MNDY headcount has risen 86%YoY in Q2 2022 and will likely rise further with this spanking new office. After all if there are empty seats, questions will be asked whether the space was needed in the first place. No better way to avoid these questions than hiring a bunch of people to warm the benches.

  4. Not all headcount expansion is bad, however it should be accompanied with equivalent top line growth. Unfortunately that is not the case with MNDY. Quarterly revenue has decreased from $89k/employee in Q2 2021 to $83k/employee in Q2 2022. Given that this is a Saas based business, this downward trend is concerning.

I am all for a fast-growing company to grab marketshare while the iron is hot. MNDY and ASAN are in a tug of war and MNDY has to invest in order to win.

After the Super Bowl spend and now this large office, I am just not convinced that they are the best fiduciaries.

I myself enjoyed the free lunches, beverages, after-hour drinks etc. at a couple of start ups that I worked for. Neither of those companies are alive today. Top line revenue slowed down to the point where it could not keep up with their operating costs and incoming cash flows.

PS. I do not own MNDY and I do not have a short position in it. As a matter of fact, I do not short stocks at all.

30 Likes
5

Sorry Beachman, but I found your rant kind of silly. You sound still pouting about the decision they made over a year ago to advertise in the Super Bowl.

And companies that expand their office space like mad, are generally doing it because their business is booming and they expect it to continue.

And they expanded their headcount by 86% (almost doubling), and mostly in the first quarter of this year, so all those new hires are still learning the ropes, and yet, with almost twice as many employees, and almost half of them trainees, their revenue per employee at the end of the second quarter had only dropped from $89k per employee to $83k per employee!!! That’s awesomely GOOD results!!! Not something “concerning.”

Here’s what I see in Monday: I try to follow the actual current numbers.

We have a company growing revenue at 75% per year. That’s basics, not details. Yes it’s down from over 100% growth at one point, but how many companies are growing revenue at 75%?

They are being very conservative in guidance because a lot of their business is in Europe which is in a certain amount of economic chaos at present due to Russia’s invasion of Ukraine, and the cut off of oil and natural gas to Europe, but all of that doesn’t mean that there is anything wrong with Monday, the company, or its business model. The invasion was in March, and they just grew at 75% in their April to June quarter, for gosh sakes!

Then we have their enterprise customers, customers spending over $50k per year, which are growing at 147% yoy this quarter, and with a record number of new $50k customers (200 this quarter).

Now, it can be a little bit difficult to grasp what 147% growth means. It doesn’t mean they have 47% more of these customers than they had a year ago. It means that they now have roughly two and a half times as many $50k customers as they had a year ago. I’ve never before seen ANY company grow enterprise customers that quickly, or anywhere close to that quickly, and I doubt you have either.

Then there is their net retention rate. For the whole company it is over 125%. For companies with more than 10 employees it’s over 135%. (That means excluding the tiny 3 or 4 employee companies). And for their enterprise customers (over $50k), the NRR is over 150%.

They are also pivoting to making their Work OS into a platform, not just for collaboration but for doing just about anything.

They announced it a quarter ago and released four new products during the June quarter: Monday Sales CRM, Monday Developers, Monday Projects, and Monday Marketer, all to work through Work OS. Customers can switch between them within Work OS. Although these products were released so recently, they already had over 1000 paying users when they announced results. That’s pretty remarkable in itself.

This company has a consistent gross margin around 89%! That’s a high, HIGH, gross margin, which shows clearly that they do not need to give major discounts to compete to get customers.

In the first quarter they had high operating expenses and an operating margin of -40%, very possibly due to the cost of producing and preparing to introduce all those new products. This quarter that had improved back to -12%.

After the first quarter they guided to 54% revenue growth for the year. This quarter they raised that guidance by 9 points to 63% (!). To me that says at least 70% by the end of the year. Talk about conservative, it’s basically impossible to average as low as 63% for four quarters with the first two quarters at 84% and 75%. (Figure it out for yourself).

And just as a by the way, Google’s President of Americas and Global Partners showcased Monday’s Work Os’s momentum in his Keynote Speech at Google Marketing Live.

So that’s how I see Monday. I could be totally wrong. And it’s still only a 6.7% position and my smallest by far.

Saul

44 Likes
6

After the first quarter they guided to 54% revenue growth for the year. This quarter they raised that guidance by 9 points to 63% (!). To me that says at least 70% by the end of the year. Talk about conservative, it’s basically impossible to average as low as 63% for four quarters with the first two quarters at 84% and 75%. (Figure it out for yourself).

That would mean something like 66% YoY growth in Q3 and 60% in Q4. That would get them to ~523m which is ~70% growth vs last year.

To see the forest and not just one or two trees (quarters), here’s an expanded picture:

Q3 2021: 95% YoY revenue growth
Q4 2021: 91%
Q1 2022: 84%
Q2 2022: 75%
Q3 2022: 66%
Q4 2022: 60%

I just don’t think the market is excited about this, especially given that they’re not profitable and don’t look like they will be any time soon. Even if they managed to beat these estimates…say they did 68% and then 62% the next couple quarters…I really doubt this is a company the market will bid up. Maybe they can grow 50-something percent in 2023, but how much will they have to spend to grow even at that less exciting pace? I just don’t see a lot of leverage possible for Monday, and with growth slowing so much, I fear it will get relegated to the bargain bin – the stocks of companies that can’t hypergrow or throw off cash.

Bear

31 Likes