- MongoDB is leading the way within the NoSQL non-relational database space, controlling the strongest market share.
- The bull thesis for MongoDB relies on MongoDB’s clear-cut leadership in the high-growth non-relational database industry and a vibrant operating momentum.
- MongoDB bears point toward a stretched valuation, bad quality profile i.e. increasing debt, accounting red flags and dilutive stock options; and the hope that MongoDB will lose its edge.
- Evidence more strongly suggests that continued top-line growth in MongoDB’s bull story is solid and sustainable in the long term, which in the high-growth tech space has been synonymous with long-term outperformance regardless of accounting questions.
MongoDB in a nutshell
MongoDB (NASDAQ:MDB) is the clear-cut leader within the high-growth, non-relational database SaaS sector. MDB has been and will continue to be an indirect beneficiary of high-growth megatrends such as AI, Machine Learning, IoT (Internet-of-the-Things) and digitalization. Each of these trends, particularly IoT, have sparked an exponential growth in supply of unstructured data resulting in an increasing demand for (NoSQL) non-relational database solutions. Such databases can much more efficiently handle this new flow of data workloads compared to more traditional relational, SQL-based solutions.
Figure 1. Comparison of traditional relational MySQL solutions to MongoDB’s non-relational solutions. (Source: International Data Corporation)
Figure 2. Chart of the growth of stored structured digital data vs stored unstructured digital data in exabytes from 1970-2020. (Source: International Data Corporation)
MDB Offers Exposure to High-Growth DBMS Niches: NoSQL and Cloud Database Solutions
Globally, the DBMS (Database Management System) market reached $58.4bn in 2020 and is expected to grow at a CAGR of 13.81% CAGR from 2021 to 2026. Within this larger space, MongoDB is focused specifically on non-relational (NoSQL) database software that represent a smaller TAM (Total Addressable Market) of ~$3bn but project to reach $22.1bn by 2026, growing at a CAGR of +31.4%. Unlike traditional SQL based databases, non-relational database systems such as those offered by MDB are uniquely positioned to grow alongside many of the digital words hottest megatrends such as IoT, AI, social media and Machine Learning that require a more efficient management of unstructured data.
In a recent study by Gartner, the IT market intelligence firm projects that 75% of all databases will be deployed or migrated to a cloud platform by 2022 with the cloud database subsegment expected to grow at a +17.5% CAGR within the 2020-2025 period. In an effort to synchronize growth alongside cloud adoption, MDB’s Atlas product offers exposure to this rapidly growing vertical. Since launching Atlas a couple years back, the product has grown from less than 10% of MDB revenue to almost 50% in 2020 and +170% YoY. MDB’s Atlas customers are typically billed monthly in arrears (as opposed to annually in advance) thus the “deferred revenue” metric of the balance sheet is becoming obsolete as leading indicator of MDB’s expected top-line growth. Atlas now has over 22k customers in 3FQ21 vs. 18.8k in 2FQ21.
The Software Development Community is Loyal to MDB
In 2020, MongoDB was named the most popular NoSQL database, the fourth most loved database, as well as the number one database that developers wanted to learn in the “Stack Overflow Developer Survey.” Developers appreciate MongoDB Cloud’s all-services in a single-system philosophy, a consistent interface that simplifies working with data and development; plus, the fact that MDB offers an agnostic, flexible, multi-cloud infrastructure that allows users to build on top of an underlying infrastructure of their choice (AWS, GCP, or Azure). DB-engines popularity ranking in the chart below clearly shows MongoDB’s relentless rise in relevance since 2013 as the ascent of unstructured data kicked-off. In that period it has surpassed IBM DB2, Microsoft Access and SQLite to take over the fifth place in popularity, and is the only document-oriented, multi-model database ranked in the top 25.
Figure 3. Chart of database management systems according to their popularity, updated monthly, from 2013-2020. (Source: db-engines.com)
MDB Enjoys a Leading Position on The Back of Its Niche Specialization and Differentiated Offering
Recent sales trends have consolidated MDB’s competitive position with more than half of Fortune 100 firms, including but not limited to the likes of Barclays, Cisco, eBay, Google, IBM and Uber using one or more of MDB’s products. Another high-profile event was the announced Alibaba partnership in 2019 whereby Alibaba will license MongoDB technology and offer the services through a DBaaS (database as a service) to its clients with contract minimums ramping over time having financial impact from 2021 onwards.
A quick calculable figure of MDB’s market share in the NoSQL niche is 15-20% when taking approximated figures of the revenue of MDB and the size of the NoSQL database market as of today. Non-relational databases have many other players such as Oracle NoSQL, Cassandra, Couchbase (closest to MDB due to its JSON-based system) and Redis. Several surveys and opinions from popular online development forums like stackoverflow.com favor MDB over other non-relational database services because of its binary format and inborn characteristics that allow developers to develop faster machine learning and AI applications in a smoother environment.
Regarding the cloud database niche, Gartner points out that while Amazon and Microsoft are the kings with more than 75% market share, MDB’s NoSQL Atlas product has experienced outstanding growth figures even through the COVID-19 pandemic. Other more similar, but smaller competitors to Atlas are ScaleGrid, Compose, and ObjectRocket, yet MDB has been able to outsell them and gain the community’s favor as mentioned earlier due to key differentiating traits like its agnostic cloud provider approach.
Earnings Quality is MDB’s Most Glaring Weakness
MDB has pros and cons with regards to its financial quality profile. On one hand, MDB’s accounting red flags cast some doubt on the firm’s management. Growing disparity between GAAP and Adjusted EPS figures, an increasingly leveraged capital structure (convertible Debt 2026 maturity, $211 convertible price) with debt levels close to 70% of the firms total assets; and a dilution risk of approximately 8-10% total market capitalization from outstanding stock options all pose risks to shareholders in the midterm. Accounting accruals was one of the most publicized points highlighted by short-sellers in 2019, yet the chart below shows that over the last year this has become much less of a concern.
Figure 5. Mongo DB’s normalized accruals in CFO, CF and BS accounting methods. (Source: Author Generated from Company Data)
On the other hand, the firm has reported fat and stable gross margins of over 70% combined with a growth story that is allowing MDB to benefit from economies of scale. As a result of the positive growth trajectory, analyst consensus expects MDB’s operating margin to reach negative low-single-digit levels by 2022 compared to the current ~-30% in 2020. Moreover, MDB has also experienced a notable improvement of its organic cash-flow generation profile e.g. CFO-to-Sales ratio increasing from less than -60% of Sales in 2016 to -7% in 2020. As of today, MDB is burning between $40-50mn free-cash-flow per annum and a similar figure is expected for the next three years. That said, the firm’s cash and short term investments on the balance sheet is sufficient at $+950mn in late 2020 after the convertible debt issuance.
Figure 6. MongoDB CFO-to-Sales and EVA Spread in percent from 2016-2020. (Source: Author Generated From Company Data)
Past experience has taught us that growth stocks like Netflix (NASDAQ: NFLX), Google (NASDAQ: GOOG) (GOOGL), Amazon (NASDAQ: AMZN) et al are judged by the development of their growth narrative and the prospect of monopolistic/oligopolistic status in the long term. As history will show, when investors start riding a growth story that is bolstered by solid megatrend tailwinds and proven user loyalty -- the bottom-line nitty-gritty details are all too often ignored in lieu of exciting and flashy top-line prints.
In summary, MDB’s aforementioned red flags are far from signaling a fraud the likes of Autonomy or Wirecard, and shorting MDB shares 12 months ago following bear reports of “accounting red flag logic”, while ignoring the big picture, would have resulted in a disastrous 2020 for would be shorts.
Positive Results and Guidance Are Boosting Momentum But Consequently Stretching MDB’s Valuation
MongoDB’s 3FQ21 results beat the street from a top-line standpoint. Moreover, MDB management also upgraded the full-year revenue guidance at +36% YoY compared to the street’s +31% YoY. To sum up, MongoDB is executing its high growth strategy at a high level, consolidating its market leading position and overdelivering.
MDB’s current valuation levels have become the most questionable component of a bull thesis. Figure 7 below highlights this weakness showing an all-time high of MDB’s EV-to-T12M sales ratio. At stock price levels of approximately $335 as of 01/06/21 closing, MDB is trading at an EV-to-C20 Revenue close to 35x and EV-to-C21 Revenue ratio below 28x. An absolute valuation case requires significant forward execution with MDB gaining stronger dominance in the unstructured database space. Alternatively, a relative valuation case provides a much more straightforward and intuitive situation. Comparing MDB’s growth-valuation metrics with other similar high-flying database-driven stories like Snowflake Inc. (SNOW) in Figure 8 below show that MDB’s current valuation is not all that lofty, comparatively speaking.
Figure 7. MDB EV-to-Sales vs its historical average from 2017-2020. (Source: Author Generated from Company data)
Figure 8. Comparative valuation metrics of MDB and SNOW as of 01/06/21. (Source: Author Generated)
MDB’s high-growth outlook is rock-solid with multiple megatrends alluding to a sustained long-term story and a strong competitive position within institutional circles and the software developer community. That said, a stretched absolute valuation and some financial red flags beg for pause. An increasing level of leverage and generally weak financials make this opportunity most enticing for long term investors willing to accumulate positions gradually as the shares take a breather from the massive rally in late 2020.
Authors Note: Thanks so much for reading! As always, please feel free to message me with any further questions or concerns. If you enjoyed this article, please click the like button right below this note, then scroll back up to the page and give the follow button a click.
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. I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.