Motley Fool Hidden Gems Investing - A Happy Monday

Episode Date: November 13, 2023

Monday.com’s earnings are part of what seems to be a good time to be a tech platform serving other businesses. (00:21) David Meier aand Deidre Woollard discuss: - The evolving climate for business-to-business platforms. - What tech companies need to consider as they hit profitability. - If Monday.com will be the acquirer or the acquired. (19:51) Rob Bates and Deidre Woollard discuss the challenges jewelers face as they roll into their big season. Claim your free five stock recommendations here: www.fool.com/dividends Companies discussed: MDNY, CRM, HUBS, SIG Host: Deidre Woollard Guests: Rob Bates, David Meier Producers: Ricky Mulvey, Mary Long Engineers: Dan Boyd, Chace Przylepa Learn more about your ad choices. Visit megaphone.fm/adchoices

From morning hockey with a cup of coffee, to Timbits and road trips, Tim's and Canadian Tire have always gone together. Now it's official. You can now earn Canadian Tire money at Tim's. Link your Triangle Rewards and Tim's Rewards accounts to earn twice with every Tim's run. Terms and conditions apply. Visit timhordens.ca slash triangle for details. It's a Monday.com kind of Monday. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard, here with Motley Fool analyst, David Meyer. David, how are you doing today? I am doing great. How are you?

Good. It's a Monday. We've got monday.com earnings. I tapped you for this today because You study a lot of tech companies, and as this quarter has been going on, I've been paying attention to not just the tech companies that serve the consumer, but the B2B companies like Monday.com, which of course reported today. Love that they do it on a Monday. But I want to start with this broader overview, because I'm thinking about these B2B tech companies, and it seems like last quarter, everything was the sales cycle slower. Companies aren't buying. It's going to be really tough. This quarter feels like it's shifted. A lot of companies came out really a bit stronger, but then there's also this other angle of maybe there's some weakness with smaller

businesses. So putting that all together, what are you seeing right now? Yeah, I'm seeing the same thing. Definitely saw a lot more and heard a lot more complaints, if you will, about the difficulties that small businesses were going through. We definitely had a few companies that have produced some really good numbers. We have ServiceNow Atlassian. ServiceNow serves a little bit larger customers, but Atlassian definitely serves a variety in terms of small and medium-sized businesses. But we also have seen and heard that the crunch is still on and that the higher interest rates are having an impact on the capital that small businesses can deploy. Paycom, unfortunately, really brought down their revenue target. Procore, which

serves the construction market, software in the construction market, gave some warnings that, hey, we're still not through this. Interestingly, Monday.com, which mainly serves small and medium-sized businesses but is moving up to the enterprise, said, demand is stable and strong from the SMB side of things. That was good from them. They did say the sales cycle is still long. There's not much data that's really saying that's improving, but their specific words during the conference call, it's not getting worse. That's an interesting maybe inflection point. We'll see how the macroeconomic data continues to roll out through the end of the year. We'll see where interest rates go. But yeah, it does feel like maybe we're

definitely closer to the bottom than the top. So we might fall a little bit further in terms of lengthening sales cycles and difficulties at small and medium-sized businesses, but it probably shouldn't be for much longer. Yeah. It's interesting too, because thinking about this cycle, this cycle is getting toward the end, but the consumer cycle is still uncertain. You've got these two things happening at the same time. Well, I want to talk about Monday's earnings because they did revenue up 38%. This is not a small company, this is over $7 billion market cap company. What is it about Monday that's so valuable? What do they do and Why is it important for these businesses? Starting from the very top, what Monday

does is, it has a low-code to no-code software development platform that companies can use to manage their workflows. Whether it's sales and marketing, whether it's operations, whether it's accounting, whatever it is, they have a platform that gives you essentially a blank sheet of paper or a blank sheet of code, if you will. You don't have to know anything about code. I mean, it can help, don't get me wrong, but just anyone can start building the blocks that says, okay, if I want to get this invoice from a supplier into our accounting system, this is the workflow that it would need, and Monday.com helps that person become more productive by being able to do that easily. I think that is what's valuable. Whenever you can help

a big portion of the employees of a business become more productive, by definition, the whole company should be becoming more productive. That's the value that Monday.com brings. That's also what we're seeing with the 38% growth, with the raising of their guidance for Q4, with the increase in Q3 and Q4, they've raised their full-year guidance and they continue to say, again, demand is strong. It's stable given to what's been happening, but it's still strong. That's why they're valuable. They bring good experiences to the businesses that they serve And as a result, they're able to generate growth, generate higher margins, generate cash flow, and the market is rewarding them. And it sounds like there's some platform

stickiness there that after you've gone to the trouble to customize this to your liking and to what works for you, you don't want to go through that again, right? That is 100% correct. From a 30,000-foot level, how you create a brand, you create a series of good experiences. And if you You can create, if any business, money.com is creating its brand and strengthening its brand its way by making its software easy to use, making it powerful, making it reliable, making it be able to do more than just something in a little niche. You can expand this across any part of a business unit and customers want to use it. It's valuable from a prospecting standpoint.

also valuable from a retention standpoint. Thinking about where the company is now, they have a tech company that's been growing rapidly, but they maybe are getting to that what I sort of call the beginning grown-up stage, where you see a company, they're young, they're growing and growing, and then they start having to be profitable a little bit. Maybe that's where growth starts to slow. It seems like they're moving from losses to small gains. How do you feel about where the company is right now, especially given that robust forecast that you mentioned? I really appreciate what you said and the way you said it there. The transition to profitability is a huge step, a huge step. Many companies don't even get there. It's an

important one as the company matures and goes through its life cycle. First of all, no, I don't think that the company is getting ahead of itself. What the transition or the inflection to profitability and increased scale and increased cash flow, what that does is that essentially opens up the enterprise market. Because big customers, big companies do not want to do businesses with smaller companies that may go out of business, that may not have the resources to serve their needs. By having a strong balance sheet, having good cash flow generation, moving through the negative margin cycle as it continues to grow very rapidly actually gives Monday.com a nice advantage when it opens a door and gives its sales pitch. The one thing that

somebody in the C-suite of an enterprise company doesn't have to worry about is, will Monday be around next week after we make the deal with them. I think you've been hinting at a couple of different things here about the way that they're adding things on. One of the things I look for with companies like this, I look at the dollar-based net retention rate, and that is strong over 110%. That means they're keeping the customer money, they're getting things, but they're also selling customers new things. I think with Monday, that's really interesting because they started getting into the CRM market, which of course puts them in competition with Salesforce, with HubSpot, with a couple of others. There's a lot of people in that market.

That worries me a little bit. There's a little bit of competition there. As they expand, you just said they're not getting ahead of themselves, but is that something we need to worry about, especially as we start thinking about AI and things like that? Yes, you should worry about it, but not in the sense of, oh my goodness, is this going to kill the company? Basically, the way you should, quote-unquote, worry about it is, will this deliver the incremental growth that investors are going to want to see? Right now, in the CRM space, the company is saying they continue to get traction, and that's a good thing. They've rolled out a series of development tools that, again,

those are serving larger customers that have developers in-house that would be using the the software. That's also a good thing. One place where they didn't get ahead of themselves, so they actually tried to roll out a marketing vertical on its own. And they said, you know what, we're not going to go in that direction. We're just going to roll it into the main program that everybody gets. And you can do what you want with it. We're not going to focus our energy on trying to differentiate what our marketing tool does versus what others might do and sell it on its own. So, what that tells me is, it's not just, hey, let's try to make everything a growth engine. They're being smart about how they grow and what they roll out. So, that brings us to AI.

So, I've seen this in a couple of other workflow management slash collaborative software companies. They're essentially using AI to make the experience even easier. So, what I mean is, again, low-code, no-code software. It doesn't require a lot of heavy development, heavy coding. But, so what you can do is, they have a beta test for their AI engine where you can say, hey, create me a dashboard that does this. create me a workflow that does that. So instead of an individual contributor going in and clicking boxes and dragging things around and making a dashboard or making a workflow diagram,

AI does it for them. And then they look and see, hey, did it do what you wanted? And the other thing that it can do is AI can suggest, hey, this doesn't seem quite right for what you're trying to do, might we suggest you do this instead?" So, they've rolled it out in beta, as have a couple of their competitors, and at least the feedback they're getting has been positive. One of the interesting things that the company specifically said about AI, and I didn't appreciate it at first, but I thought about it a little bit more, their customers don't know what to expect from AI. They're actually delighting by having something that they're able to play with and feel the experience. Even that right there, again, gets back to the brand building

that we talked about earlier. Especially in a beta test, if it goes well, you get customers using it, you get good feedback, it can feed upon itself. Then we'll see how the AI tools continue to take hold over time. Well, I think that makes me think that if I'm a Monday customer and I'm hearing from my bosses and from other people like, we need to be doing something with AI and why aren't we using AR? How are we using AI? You can say, we're using this platform and it's using AI and we're testing this within it. It feels like a way to scratch that itch, which it seems like every company has that itch right now. Yeah. And, and the other thing that you're one, first of all, you're a hundred percent correct.

And the other thing it's doing, it's using AI in, in a quote unquote, safer environment. You're not taking AI and putting it in front of your customers, right. And running the risk of having something not work. You're doing it behind the scenes. You're doing, you're doing it internally to try to make your own process, your own workflow process is better where let's say it doesn't, let's say something doesn't work quite right. Well, instead of, uh, you know, instead of having that potentially damage a customer relationship, you're working out any bugs with monday.com in order to make the process better to help you get a better experience. Not working with generative AI in customer-facing terms right away is a good thing, in my opinion.

We had talked about the earnings a little bit before the show. One thing that mentioned that kind of stuck in my head was that they talked about mergers and acquisitions in the future. You mentioned they might be like little tuck-ins, those acquisitions that kind of maybe level up a certain thing. But I was wondering, could Monday itself be a target? I mean, it's kind of attractive. It's not too big that it can't be swallowed whole by somebody with a big appetite. What do you think? Certainly possible. In fact, probably even a little bit more than possible. Let me say it this way. If Salesforce hadn't gotten a new CFO who seems to be doing a great job of reining Mark Benioff in terms of how he

opens his checkbook, I would think Monday.com would be on their radar screen. I think it would fit in. Perhaps it would help get them to the next generation of CRM, marketing, etc. Again, because it's more of a platform as opposed to a specific software that they have developed. However, I don't think at this point, Monday.com would actually want to be purchased. I think they're seeing enough momentum, especially in the work that they're doing. When you have more than a billion dollars of cash on the balance sheet, virtually no debt. You're in the process where you're generating cash flow now, and you have a platform. They specifically said, in 2024, we are in a strong enough position where we can start looking for tuck-in acquisitions,

acqui-hires, things to bring incremental value to the platform that, again, they can sell to a customer base that we know based on their dollar-based net retention wants to work with monday.com. It could be really interesting starting in 2024 to see where they're looking and if they make any, there's no guarantee, what types of acquisitions they make and bolt onto the platform. Yeah. I think 2024, we're going to see a lot more M&A than we did this year. Well, yeah. The other reason I think that you're going to see it is because private company valuations are coming down. There are lots of private companies with great technology who are maybe looking for an exit that they didn't necessarily have as a result of what happened in

2020 valuations in 2022. They might get some good deals as well. Yeah, absolutely. Well, I know Monday's got their investor day as part of their conference coming up on December 6th. So sort of a broader question for you. This is one I kind of go back and forth with myself, is how much attention to pay to investor days? I mean, I know companies want me to pay attention to them, and sometimes I do, and I watch them, and sometimes I get a little annoyed because there's too much salesy stuff and not enough roadmap-y stuff. You're a long-term investor. How do you think about investor days? Are they a must-attend for you, or maybe, or where do you land? So I am definitely a must attend. Okay. So here, here's my, here's

my logic. One, I want to see how they, I want to see how management explains what their business does. And if there's any incongruencies between how I look at their business and how they look at their business, I want to understand like who's, who's wrong. And hopefully it's me, But you're right, they are as much for marketing to prospects as they are for marketing the company to investors. You have to get past the bells and whistles and things like that. But the other piece of the logic that I use is, anytime you get information from a company, a good thing. Again, what it can do is it can test, is it matching the way I'm looking at the company? Is it matching the way other investors are looking at the company? Is there

something new that the company is doing that I need to factor into my long-term analysis of the company? You do tend to get those types of big announcements at an investor day. There's usually one, we'll call it medium size to big announcement. And in the investor, if I remember what I just heard correctly, they're going to talk more about AI, which makes complete sense. You know, I get what they're doing now in the beta testing. So let's see what they have to say about AI in their investor day. Yeah, absolutely. Good reasons to attend. Thanks for breaking that down with me, David. You're very welcome. You just found out that your sales team is at risk of missing quota.

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dividends to claim your five dividend stock recommendations now. I recently sat down with Rob Bates, news director of jewelry business outlet, JCK, to discuss diamonds and the jewelry industry. In this segment, we talk about the future of retail jewelry sales. you mentioned the big jewelry stores earlier and a little bit about the impact of the pandemic what is the state of some of the the mall jewelers like signet which is behind a lot of the popular jewelry brands so i've been doing this for about 30 years and i've seen ups and downs and you know the financial crisis. Obviously, in the beginning of COVID, everybody was terrified. But it ended up being two of the best years ever for the jewelry industry. Two, probably three of the best years

ever for the jewelry industry. Because what happened was, first of all, a lot of stimulus money flooded into people's bank accounts, right? So, that helped. And people weren't able to travel. And a lot of people weren't going out to dinner. And they were spending a lot more time on Zoom. And because of those kind of convergence of three factors, people wanted jewelry. They wanted nice earrings for Zoom. They had no place to go, so they bought jewelry. So these were two of the best years ever in the jewelry industry. And I work in an industry that's full of people who complain all the time. It's full of complainers. And nobody was complaining. It was the weirdest thing. I felt it was like an alien group, because usually there's somebody mad about

something. Yeah, so it was just this really amazing period. So, you know, this is an industry that usually sales go up maybe 2% a year, 3% a year. I mean, this industry was locking 20% gains, 25% gains. I mean, things that people had never heard of. So, Cignet was definitely a beneficiary of that. And I should say that Cignet is basically the mall jeweler at this point. I mean, there's one or two others, but Cignet has basically, they own Kay, they own Jared, they own Zale, they own what used to be called Piercing Pagoda is now Banter. So, they own just about everything in the mall. Even when I started out and seeing that was the number two company, there was all this talk that Cignet owned three stores in the same mall. Now, they own so many stores

in the same mall. It's really crazy. I think Cignet's management has actually been smart in certain ways. The prevailing wins are going to be tough because, again, they had this big COVID-era boost, and they played it very smart. I mean, I'm not saying it was all because of happenstance, but they played it very smart, and now their sales are falling. That was this high watermark that I think people aren't going to be able to equal for a long, long time. So, what Cignet did is very smart in that they bought a lot of e-tailers. I think they bought three companies, I believe, in the last couple of years. They bought Blue Nile. They bought James Allen. They bought Diamonds Direct. And these are all companies in the quote-unquote

accessible luxury space. So again, you look at what Zales was, what was Kay. These were jewelers for the great middle class. These were jewelers where kids graduated from college and they went off and bought a diamond and gave it a ring, and he got a decent price at it from Zales. Again, the middle class is having a tough time. Young kids have student loans. There's just not the same opportunity. So, they're kind of moving their mix up to this quote-unquote accessible luxury space and getting more involved with dot-coms. And what they've done is very smart. So, when I started, Cignet was the strong No. 2 behind Zales, and then at a certain point, Cignet overtook Zales, and then Cignet bought Zales, and so then it became the strong No. 1,

like this incredible No. 1. And during the pandemic, they had a lot of cash, because they were doing very well, and they ended up buying a whole bunch of things. So, now they're at this very high place in the market. They'll argue it's only 12% of the market, 10% of the market, because the jewelry business is very fractured. But still, there's nobody in the United States who even comes close. I think a mall jeweler and malls in general are challenged, but I think they really proved themselves during a very difficult period. What do you think of some of the smaller direct-to-consumer retailers? I mean, obviously, Cygnus has bought a couple of them now. We heard 20, 25 years ago, it was like,

oh, well, when the internet came along, it was going to get rid of jewelers and people would buy online. That has and hasn't happened. Do the Canids direct-to-consumer businesses get a larger market share? That's tough. I mean, I think all these direct consumer market businesses have the same issue, which is what they call customer acquisition costs, because of things like Facebook and Google, that you have to spend so much money on advertising, particularly digital advertising, that it's very hard to be profitable. And unless you're subsidized by venture capital, it's very, very difficult. Now, I'm not saying it's impossible because people do do it, but it's very, very difficult. I think the big selling

point of direct-to-consumer businesses was the fact that they didn't have brick-and-mortar stores, so they wouldn't have to pay real estate costs. But what we're finding is that those brick-and-mortar stores are good advertising, right? Because people drive by them and they say, hey, it's a Kay's Jeweler, that's Azale's, and they remember it. So, what you're seeing now more is companies who are basically inundated with these consumer acquisition costs. There are companies that spend $40 million a year on advertising, and it's just insane. It's not even a standard TV commercial. They're just putting little Facebook ads. So what we're seeing is a lot of these formerly D2C brands start opening brick and mortar

stores to get their name out and to establish a physical presence. And that's good, but I think it's tough for a lot of them. And there's a lot of lab-grown D2C brands, and a lot of them are having huge, huge problems. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.