MongoDB: Look At The Big Picture

Summary

• MongoDB reported Q1 2019 earnings last week, and there were mixed reviews, but the stock has rallied since.
• MongoDB's offerings seem to be the way of the future.
• The company's growth, especially in Atlas, is incredible.

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Long-Term Staying Power?

MongoDB (NASDAQ:MDB), the leading vendor in NoSQL databases, might be expensive today, but looking at the big picture, this stock has more room to run. The combination of disruption, innovation, and incredible growth has set up MongoDB to be a big-time winner.

Investors did not seem very impressed with last week's earnings report, but the stock has rallied back, so I think investors are starting to catch on. Catch on, to say the least. Mongo - I presume the name comes from the word humongous - has been on fire. Since IPO'ing in October of 2017, the stock is up more than 100%. This will be a deep dive into MongoDB to see if it is just another IPO tech darling or a candidate for real, long-term staying power as a technology provider.

MDB data by YCharts

NoSQL, No Problem…

As stated, Mongo is the leading vendor of NoSQL databases. SQL stands for "structured query language", and it is the norm programming language for databases. NoSQL stands for "not only" SQL, and Mongo is part of this new breed of database.

Historically, Oracle (ORCL) has been the gold standard for this space with its SQL, or relational database management system. Essentially, relational databases store data in rows and columns, just like an Excel spreadsheet. This is nice because it provides structure and allows organizations to work with a great amount of data. However, relational databases weren't built with the cloud and big data in mind.

Mongo and other non-relational database providers allow developers much more flexibility and the ability to scale. This is because, instead of rows and columns, the data can be stored in a document orientation. Think about it this way. You can use Mongo to store things like blog posts or social media links rather than need to input data into nice, neat columns. Oracle, for now, is still the gold standard, no doubt. But the world is changing. Mongo is tailored for the future. Most of the data collected these days is unstructured, whether it be machine data or website interactions. It is extremely difficult to scale that sort of data in a relational system because it is so unstructured. Therein lies the advantage of a NoSQL system like Mongo.

However, there are drawdowns to NoSQL. For instance, financial firms and e-commerce companies do not yet trust NoSQL because of security concerns. NoSQL systems sacrifice what's called ACID compliance for flexibility and scalability. But Mongo, just in February, released ACID 4.0 which is dealing with this problem. As soon as financial firms start trusting MongoDB, it will be a huge validation of the technology.

So, we've established that NoSQL looks like it is going to be the database of the future. In Mongo's IPO prospectus, the company mentions that around 30% of its new business migrated from relational systems. Right now, most companies can use both SQL and NoSQL, but the world is only getting faster; I don't see SQL being able to keep up.

Is Mongo the Best?

But still that raises the question: why Mongo over another NoSQL provider? According to DB engines, Mongo places 5th in the ranking with Cassandra, in 10th place as the next NoSQL provider. Cassandra is used by a lot of start-ups, but it is lacking a few things that Mongo has built. One is the ACID compliance, touched on earlier. The next is something called an aggregation framework. In the latest conference call, an analyst asked a question on this exact topic. The CEO stated that this differentiated Mongo from almost every other NoSQL. An aggregation framework allows developers to analyze data in the database, instead of needing to put another application on top of it. This is huge because it saves developers even more time.

What's more, also in the last earnings call, Mongo announced a partnership with IBM (IBM). This is just another sign of validation. Though I wouldn't put too much confidence in IBM's salesforce selling Mongo, it is a good signal.

I didn't even include total addressable market numbers because the database industry is plenty big. There is enough room to go around. Estimates are that it will reach $63 billion by 2020. Assuming Mongo can eventually reach 5% penetration, that calls for almost $3.2 billion in revenues, almost 15x Mongo TTM sales. So Mongo will not need to worry about saturation anytime soon.

And that is precisely why the company is spending so much money: to gobble up some market share with a superior technology that is tailored for the modern world.

What About Profitability?

In 2016, just on sales and marketing alone, Mongo spent 153% of revenue. Better, but still big, the company spent 79% of revenue in 2017 on sales and marketing. And that is not even counting the stock-based compensation. In the latest quarter, that expense - or non-expense, should I say - was almost 16% of revenue. So, it's clear that the company is spending money. A lot of it. But is this good or bad? If Mongo is truly disruptive in this large of an industry, shouldn't investors want it to spend as much as possible without it going overboard?

Thankfully, Mongo is not quite going overboard. Free cash flow was negative $8.4 million in the latest quarter. Management did hint that this would actually get worse next quarter. But the company has about $112 million in cash so even if it burned $40 million this year, it wouldn't have to take on debt or sell shares for about three years, assuming cash flow margins don't improve (which is unlikely).

On the last call, the CEO mentioned that he has had at least 20 meetings with C-level execs interested in Mongo. Up until this point, Mongo had been mostly self-service, since it is open sourced. There have been over 30 million downloads of Mongo's Community Server, basically a freemium, open sourced version. From there, Mongo upsells extra capabilities. This is the business model in a nutshell. This is to say that, traditionally, Mongo hasn't had to worry too much about a sales team. Its popularity with developers grew through word of mouth. Hence the 80% subscription margins. However, now that bigger enterprises are interested, that is another reason for the big-time spending as it requires sales associates.

But sometimes the prudent thing is to spend. It might even be irresponsible if Mongo were attempting to be profitable with this great of an opportunity in front of them. What's more, once customers begin using Mongo, they spend more and more. The revenue expansion rate has consistently been over 120%.

Mongo Growth

The company is not short on growth, that's for sure. Subscription revenue jumped 53% in the latest quarter. And we haven't even talked about Atlas yet! Atlas is Mongo's DBaaS (database-as-a-service) offering. It started just about a year and a half ago, and it is a cloud-based product. For those customers who don't need all of the capabilities that Mongo's core product, Mongo EA (Enterprise Advanced) has, Atlas is the best choice. Atlas has been growing like an absolute weed, and it is becoming a larger part of revenue each quarter. This past quarter, Atlas revenue was 14% of total revenue or about $6.7 million, up over 400% from a year ago.

The number of Atlas customers is now up to 4,400 from just 1,300 a year ago. So, demand is obviously very strong. Atlas is yet another example of Mongo's ability to adapt to what customers want. Atlas also gives Mongo's revenue a clear upside as it became a large portion of total revenues.

Going back to that figure of 30 million downloads of Mongo's Community Server, it would be interesting to see that in the context of Atlas. According to this presentation, apparently 10 million of those 30 million downloads came in the past year. Let's say 1% of the freemium users in the past year converted to Atlas. That would be 100,000 customers.

Beware, the next two paragraphs will have a lot of numbers…

Right now, Atlas's quarterly revenue is $6.7 million, and it has 4,400 customers. It is likely that Atlas will grow to be more than 14% of revenue by the fourth quarter. Let's say 18%. The high end of yearly guidance is $220 million. 18% of $220 million is about $40 million.

If the company can reach 7,000 Atlas customers by year-end, that would be about $5,700 per customer spent only on Atlas (40 million/7,000). Again assuming 1% penetration of this past year's downloads, that is 100,000 customers. Even if the revenue per customer halves to $3,000, that is $300 million in just Atlas revenue, 50% more revenue than all of Mongo's estimated 2019 revenue. That is just a super, long, confusing way to say… there is some serious opportunity here.

Surfacing

Now, to surface from this deep dive.

So, Mongo looks to be the dominant player in the NoSQL space that is geared for the future of building applications and big data. To make inroads the company is spending like crazy, but not quite going overboard. Atlas will become a catalyst and a driver of growth, and it should be interesting to see how customers respond to ACID 4.0 being rolled out. Atlas appears to have a huge market opportunity, and Mongo looks to be giving customers what they want.

As always, though, tech moves quickly. As of now, Mongo looks to be an extremely promising investment but it is hard to tell if it will be the dominant database provider in the future. For now, Oracle is and will be for a while but the signs point to Mongo as a prime-time disruptor.

Mongo's enterprise value of about $2.6 billion and $220 million in 2019 revenues show the company is not cheap. At almost 12x forward revenues, Mongo is quite pricey. But think about the bigger picture. If Mongo disrupts the entire database industry, do you think it will have less than a $3 billion market cap? Doubtful.

Go big. No scratch that. Go hu-mongo-us.

Analyst’s Disclosure: I am/we are long MDB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.