Baird begins coverage of Monday.com with $250 target and neutral rating: Is it worth investing??

On Tuesday, 23^rd July, Baird initiated coverage on Monday.com Ltd (NASDAQ: MNDY) with a neutral rating and a $250 price target, suggesting a modest upside potential of 6.4% from the stock’s current trading price.

Baird’s analysts, led by Rob Oliver,  praised the company’s extensible platform and strategic push into enterprise markets through its diversified offerings in work management, including Sales CRM and Dev tools.

This initiation aligns with their broader coverage of work collaboration tools, positioning Monday.com favorably against competitors like Asana and Atlassian’s Jira.

Recently, Wolfe Research also initiated coverage on Monday.com with an outperform rating and a more optimistic $300 price target. Analyst Ethan Bruck emphasized Monday.com’s strategic advantages in a competitive SaaS environment, highlighting its product cycles and pricing power as critical drivers for future growth.

Wolfe’s bullish stance is predicated on the company’s potential for 30+% growth over the next three years, a testament to its innovative product offerings and efficient operational margins.

Amid these optimistic views, the broader enterprise software market faces headwinds, as noted by Piper Sandler. The firm recently adjusted its price targets downward across a range of software stocks due to macroeconomic concerns, signaling potential challenges for the sector.

Despite these concerns, Monday.com continues to be one of their highest conviction ideas, demonstrating resilience and potential amidst market volatility.

Financial performance

Recent financial performance further solidifies the company’s growth narrative. In its latest quarterly results, Monday.com reported a Non-GAAP EPS of $0.61, outperforming expectations by $0.21, with revenue growth of 33.6% year-over-year.

Monday.com anticipates continued robust growth. For Q2 2024, the company expects revenues between $226M and $230M, surpassing analyst expectations. This guidance is backed by a strong pipeline of new products and a strategic focus on larger enterprise accounts, which could further enhance its market position

Monday.com is projected to announce its Q2 2024 results on August 12, 2024. The expectations are set high with an EPS GAAP estimate of $0.03, a significant improvement from the previous year’s negative $0.15 EPS. Revenue estimates for Q2 2024 are pegged at $229.11 million, up from $175.7 million in Q2 2023, indicating a substantial year-over-year growth.

Fundamentals and operational highlights

The company has evolved from focusing on simple task management to offering comprehensive solutions that include sales CRM, development operations, and anticipated expansions into customer service solutions. This diversification has helped position Monday.com as a leader in collaborative work management, increasingly targeting larger enterprise clients.

The company’s strategic pricing adjustments have also been a crucial growth lever. Despite potential risks of increased churn due to price hikes, the expansion into new verticals and enhanced product offerings suggest a balanced approach to scaling the business. The introduction of new features and improvements in existing ones continue to attract and retain a diverse customer base.

In terms of valuation, while Monday.com trades at a premium, this is reflective of its high growth potential and market positioning. According to analysts,the company’s strategy of scaling into new areas and enhancing its platform’s capabilities could justify this premium, particularly as it continues to show strong free cash flow margins and operational efficiency.

Having examined Monday.com’s fundamental strength, and market positioning, it’s clear that the company has solidified its role as a significant player in the SaaS domain. However, while fundamentals provide a strong narrative, the true test lies in market perception and price action, which often tell their own story.

So, let’s shift our focus to technical analysis to gauge the potential trajectory of Monday.com’s stock.

Bulls must remain cautious

Monday.com’s stock rose to an all-time high of $450 a few months after its IPO in 2021. However, it entered a downtrend immediately after that crashing to $80 levels subsequently.

MNDY chart by TradingView

It has made a dramatic recovery since late 2022, rising to a high above $250 earlier this month, but is finding it difficult to trade above $240, a level it has tried to surpass four times this year.

Considering that investors bullish on the stock must remain cautious. One shouldn’t initiate fresh long positions unless the stock gives a weekly closing above its recent swing high at $251.48.

Traders who are bearish on the stock do have a low-risk entry here, but must wait for the stock to close below its 50-day moving average, which it hasn’t since reporting its Q1 results in May. If the stock does close below its 50-day moving average, that will mark a bear phase on the short-term charts and one can short the stock with a stop loss at $252.
If the bearish momentum intensifies, the stock will find support only near its recent swing low near $180, where one can book profits.