Smartsheet vs. monday.com: Which Software Stock is a Better Buy?

Application development software facilitates organizations in developing computer software solutions, enabling them to perform different tasks with higher efficiency. 

With an estimated CAGR of 25.54% over the next five years, the global application development software industry is projected to reach $1039.89 billion in the final year, Verified Market Research reports. The industry is expected to grow due to the rising demand for cloud-based solutions and further usage of the Internet of Things (IoT) technology.

Keeping that in mind, today, I am going to analyze and compare two software stocks, Smartsheet Inc. (SMAR) and monday.com Ltd. (MNDY), to determine which one is a better investment at the moment. 

Based in Bellevue, Washington, Smartsheet offers a cloud-based platform that allows teams and organizations to plan, capture, manage, automate, and report on work. Founded in 2012, MNDY creates software applications in the U.S. and worldwide. It also provides solutions for marketing, CRM, project management, software development, and other fields.

Year-To-Date (YTD), SMAR is down 31.5%, while shares of MNDY have plunged 49.7%.  

Recent Developments

On February 24th, DA Davidson analyst Robert Simmons upgraded Monday.com to "Buy" from Neutral after the company's shares had fallen over 20% amid the Q4 earnings report. The main reasons for the company's upgrade were positive free cash flow and 2022 guidance, reflecting a “mix of a good revenue and worse margin.” The analyst noted, "The company is bringing out new products, strengthening its top of the funnel, and expanding its go-to-market, giving us confidence in the long-term durability of growth." However, the investment firm lowered Monday.com's price target from $275 to $170.

Recent Quarterly Performance & Analysts’ Estimates

On December 2nd, Smartsheet Inc. reported earnings for the third fiscal quarter of 2022. Its total revenue grew 47.1% year-over-year to $144.63 million, primarily due to a 46% year-over-year increase in its subscription revenue to $132.6 million. Besides, the company's professional services revenue rose 50% year-over-year to $12.03 million. As a result, SMAR surpassed the Wall Street revenue estimates by $4.7 million. Also, the company reported Non-GAAP EPS of ($0.03), beating analysts' expectations by $0.08.

It is important to note that the average annualized contract value (ACV) per domain-based customer stood at $6,368, representing year-over-year growth of 37%. Besides, the number of all clients with ACVs of $5,000 or more increased 27% YoY to 14,228. Finally, the dollar-based net retention rate was 131% compared to 125% in the year-ago quarter, thus increasing the long-term value of the company's customer relationships.

For the next quarter, analysts expect SMAR's EPS to come in at ($0.15), showing a 274.72% year-over-year decrease. Its revenue for the fourth quarter of 2022 should grow 38.00% YoY to $151.63 million.

On February 23rd, monday.com issued its earnings results for the fourth quarter of 2021. The company's shares plunged over 20% after it had released a loss during the fourth quarter. For now, let's focus our attention on the company's Q4 operating metrics. 

In Q4, the company's total revenue increased 90.5% year-over-year to $95.5 million, beating the revenue consensus estimates by $7.7 million. The company also expanded its Non-GAAP gross margin by 100 bps to 90% as of 4Q2021. In addition, its net dollar retention rate was over 120% versus 105% as of the fourth quarter of 2020. The total number of paid customers came in 34% higher at 152,048 million from 113,888 as of December 31st, 2020, while the number of paid customers with more than $50,000 in annual recurring revenue (“ARR”) was 793, showing a 200% increase from 264 as of December 31st, 2020. 

However, the company posted a $32.61 million net loss in the fourth quarter of 2021, compared to the year-ago value of $62.86 million. As a result, MNDY's Non-GAAP EPS has been reported at ($0.26), beating analysts' estimates by $0.26. 

Analysts reached a consensus projection of ($1.02) EPS for the first quarter of 2022. Moreover, its FQ1 revenue is expected to come in at $101.22 million. 

Comparing Options Market Sentiment 

Looking at the March 18th, 2022 option chain for both SMAR and MNDY, we can define options market sentiment by analyzing the open interest levels. For SMAR, the open calls/open puts ratio at the $55.00 strike price comes in at 0.14x, indicating a heavy bearish options market sentiment. When it comes to MNDY, the open calls/open puts ratio at the $160.00 strike price is 1.26x, demonstrating a bullish sentiment.  

Conclusion

While Smartsheet and monday.com should capitalize on the software industry’s growth in the long term, I believe monday.com currently presents a better buying opportunity because of its superior financials, favorable analyst coverage, and better options market sentiment.

SMAR shares were trading at $53.43 per share on Monday morning, up $0.36 (+0.68%). Year-to-date, SMAR has declined -31.01%, versus a -8.18% rise in the benchmark S&P 500 index during the same period.

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.

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