MongoDB: Valued Like A Penthouse
Summary
- MongoDB's growth factor will cost a lot to service.
- While it plays into a lot of favorable near term trends, customer stickiness isn't assured.
- Investors should either hold for the long term or trim their position.
Source: Hedgeye
MongoDB (NASDAQ:MDB) is the Snap (SNAP) of databases. Snap has been a short's favorite because the bulk of its features were successfully mimicked by competitors. While Snap has a joker in AR (augmented reality) to keep fighting for market share, no such card exists for MongoDB in the database world. Like Snap, MDB will have to spend a lot of cash to keep evolving, protecting, and distributing its technology.
As a result, MongoDB risks getting stuck on the defensive foot as it tries to appease both customers and shareholders. Given this execution risk, MongoDB is best acquired at a significantly lower price to the current trading value as it will continue to remain a volatile stock to own.
Demand (Rating: Bullish)
Source: Author (using data from Seeking Alpha )
Market opportunity
According to IDC, the database market is worth $71B in 2020. This is projected to expand to $97B by 2023. MongoDB currently captures less than 1% of its total addressable market. We can't yet conclude that MongoDB can touch every part of its potential market. Whichever direction it turns to, it will face serious rivalry from supercarriers like Google Cloud (GOOGL), Amazon (AMZN) AWS, and Microsoft (MSFT) Azure. The three largest cloud providers have the financial and technical wherewithal to fold any technology platform into their deck. For these cloud giants, it doesn't matter if the platform (competitor) is on their supply-side or if it merely sails as an adjunct to their demand side.
Potential
MongoDB addresses the flexibility and scalability issues of relational databases. It has garnered over 90 million downloads since inception, with strong popularity amongst app developers and NoSQL enthusiasts. It ranks within the top five databases on DB-engine, and it has consistently been the highest-ranked document store. MongoDB can also be likened to the Shopify (SHOP) of the database world. It gives developers and enterprises an easy platform to set up a database either via a third party datacenter or a fully managed cloud service.
Since MongoDB has a usage-based billing model, these enterprises have to keep growing and storing data for them to increase their yearly spend. The world might be at peak demand for online attention; however, it isn't at peak internet users. Every million addition to the global population of internet users adds billions in API calls, logs, and data transmission per user/device. Most of these transactions will be stored in databases.
In a world where mobile apps, IoT devices, and game studios witness a yearly proliferation in data, MongoDB will continue to record strong revenue. As a result, the case for MongoDB to keep driving demand from new and existing enterprises remains compelling.
Business/Financials (Rating: Neutral)
Source: Author (using data from Seeking Alpha)
Products
Atlas. Atlas currently represents 41% of revenue while growing at 80%. It is now a $200m ARR business. Atlas has both a self-serve and a direct sale option. New updates are geared towards charting & analytics, security, search, and improved usability. Atlas consistently builds upon the latest NoSQL challenges. And given its open-source support, there is more room for rapid review and product improvement.
Enterprise Advanced. The adoption of EA will be driven by companies with privacy concerns. These enterprises will prefer a datacenter or an on-prem deployment.
Going forward, there will be a fair demand for both Atlas cloud and EA as database security and privacy concerns will split the adoption of its offerings fairly between those who want fast deployment and those who want a secure deployment.
The addition of new capabilities to drive scalability, security, and usability will improve the monetization of its offerings. As usage grows, MongoDB will break-even per customer.
Financials
Source (Author)
MongoDB's strong growth is compelling, with a net retention rate above 120%. The company uses a combination of a freemium and a robust enterprise platform to drive growth. The freemium model builds upon a solid base of developer advocates and product adoption while the enterprise offering provides stability and security for advanced users.
Given the huge market opportunity ahead, the potential for MDB to keep acquiring market share is convincing. Driving the adoption of MongoDB amongst enterprises relies on the predictable long-term trend of the proliferation of unstructured data.
MongoDB will have to keep sacrificing near term profit to build a solid base of customers who will improve operating margins as their usage of MongoDB's offerings grow. This means it has to double down on the adoption of its solutions while raising enough cash to build the right team and technology to stay competitive. Given the ample cash on its balance sheet and the improving cash flow trend, MongoDB remains on track to improve its return on investment capital.
Macro/Competitors (Rating: Neutral)
Source: Google
Competitors
MongoDB has proven its mettle over the years in the face of strong competition from relational database management systems. Enterprises still go with Oracle (ORCL) and other large database platforms. However, in the document database space, MongoDB is king. While it faces competition from platform-native flavors of its offering, MongoDB can remain competitive as it is platform agnostic. It consistently provides features that enterprises need while leaving behind adopters of clones of its past iterations. The technical capabilities to consistently push the boundaries of what obtains in the Document DB world remain one of its competitive moats.
Macro
MongoDB has provided some color around the impact of COVID-19 on its near term growth. While the impact is projected to be minimal, the sticky nature of databases as essential digital transformation tools will drive a sharp rebound.
Investors/Valuation (Rating: Neutral)
Source: Author (using data from Seeking Alpha)
Investors
Investors have been optimistic about MongoDB, and this has driven valuation to lofty heights. Analysts have a consensus price target of $156. However, both its short interest and short percent of float are on the rise. This will drive daily return volatility in the coming quarters.
Valuation
Valuation remains frothy at 21 P/S ttm. Bargain hunters will have to capitalize on corrections and drawdowns to acquire some position.
Source: Author (using data from Seeking Alpha)
Assuming MDB is projected to record sustainable growth off the explosion of mobile apps and IoT devices, which will drive expansion amongst existing customers and strong greenfield wins, the table above shows a series of scenarios that could play out. The base case assumes a 20% revenue CAGR for the next ten years and FCF margin of 30% for the next ten years. If we discount the cash flow with a weighted average cost of capital of 10%, using shares outstanding of 58m, we get a price per share of $117. This valuation has a lot of bullish assumptions with a yearly 30% FCF margin (operating margin expansion+growth in deferred revenue) highly difficult to achieve.
Source: Author (using data from Seeking Alpha)
Using a multiple of FCF approach, we get a significantly higher share price assuming 10Y revenue CAGR of 20%, FCF margin of 30%, and FCF multiple of 30x for the terminal value. These assumptions depend on perfect execution and massive market share gain.
Source: Author (using data from Seeking Alpha)
To paint a clearer picture, here is the evolution of MDB's EV/Sales multiple, assuming a 12.5% yearly return for the next ten years. This assumes a yearly share count dilution of 2.5% for a real return of 15%. In the base case in which revenue is expected to grow by 20% every year, holding on to MDB will feel like holding hot potatoes as it will continue to trade at double-digit sales multiple, well above the median EV/Sales multiple of established cloud companies. In the bull case, assuming a yearly return of 12.5% and yearly revenue growth of 30%, MDB won't trade close to the median EV/Sales of established cloud plays until 2026.
Source: Author (using data from Seeking Alpha)
The chart above shows the way three of the largest internet platforms generate free cash flow. All the assumptions laid out in the first part of the valuation section depend on the scenario in which earnings become accretive to free cash flow. At the current trajectory, MongoDB will require a Zoom-like (ZM) quantum leap to achieve the desired reality.
Source: Author (using data from Seeking Alpha)
Risks
Source: Author
Consumer risk is a serious concern for MongoDB as the cost of migrating to another platform won't be a huge factor when DBAs are calculating the long term ROI of using a different technology based on their application stack.
Shareholder dilution is a top risk to be considered as the cost of product development means delayed profit will continue to impact FCF ramp.
Sector risk is also a big concern as the tech sector remains oversubscribed in the near term. This will extend the breakeven period for new investors.
Investors should also consider momentum risk as the rising short interest and historical VaR suggest there will be more volatility down the road.
Conclusion (Overall Rating: Hold)
Source: Author (using data from Seeking Alpha)
MongoDB has strong potentials; however, it will continue to require huge capital investments to unlock these potentials in the face of growing competition and shifting marketing trends. At the current valuation, MongoDB is priced like a penthouse.
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This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
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Comments (23)
By the way, it won't last long
and the bulls will stand in the cold rain...
Your article is written well, based on facts.
the author dosn't want to hurt the bulls' feelings.
If I had written the article, I would have said:
Insane valuation.