MDB - MongoDB Shares Are Expensive Exposure To The Data Management Market

2023-08-04 07:38:46 ET

Summary

• MongoDB is facing competition in its high-growth market and has a history of negative earnings and cash flows.
• The company's strategy focuses on making migration to its database easier and optimizing its products for different types of work and applications.
• MongoDB's financials show impressive sales growth, but conservative investors should wait for lower prices before investing.

MongoDB (MDB) is a sell based on a DCF valuation analysis with assumptions such as 15-20 % growth rates, an 8 % discount rate, and a 35 terminal multiple. The company is facing lots of competition in its high-growth market.

Introduction to Company

MongoDB inc. is an American software company offering its namesake document database program, MongoDB. Founded in 2009, MongoDB provides solutions for storing and querying large amounts of unstructured data which started accumulating with the rise of many large web platforms. It was innovative in developing document-oriented database systems as an often-cheaper alternative to relational databases.

Market Trends, Innovation, and Strategy

In general, MongoDB’s products are priced such that the more their products are used, the more MongoDB demands in payment. As can be inferred from the pricing table below, their MongoDB Atlas developer platform’s cost is determined by the chosen server’s storage, memory and CPU power, meaning large, demanding applications built with MongoDB cost more than the immediate start-up.

And can be seen in the above picture, this is not a bad market to be in. As an ever-larger pool of applications will be built and the existing ones will generate ever more data, this means demand for good data management solutions will only increase.

As the most popular NoSQL database, the firm has based its strategy to win even more market share on 1) Making migration from other data management systems to MongoDB’s easier, 2) Optimizing data management products for other types of work such as Time Series, Search, and Analytics, and 3) Optimizing its data management products for other applications architectures such as Serverless and Edge. With this strategy, the company has had success in bringing in more customers as can be seen in the following table:

Financials

In its latest fiscal Q1 2024 results, MongoDB has reported Total Revenue of 368,280 K USD, a 29 % increase from the Q3 2023 figure of 285,447 K USD which is great feat compared to Data Management Software Market’s growth from the year 2022 to 2023 of 12.9 %. This results in Q1 2024 gross profit of 270,831 K USD, 30.6 % larger than Q1 2023’s 207,232 K USD. While impressive sales growth, the company has also upped its total operating expenses, which are comprised by the items Sales and Marketing, Research and Development, and General and Administrative, by 20 % compared to Q1 2023. In Q1 2024, Total Operating Expenses were 339,378 K USD while Q1 2023 were at 283,172 K USD. Although the operating expenses have risen, the figures result in a less-negative Net Income in Q1 2024 of -54,246 K USD compared to Q1 2023’s Net Income of -77,294 K USD. This is a result of both increased sales but also a large income of 16,788 K USD recognized under the post Other Income, often used for income generated from other sources than the company’s main business lines.

In its balance sheet, the company’s Q1 2024 Total Assets 2,580,525 K USD didn’t change much from the Q1 2023 number 2,588,893. The company’s value of its short-term investments went from 1,380,804 K USD in Q1 2023 to 1,181,641 K USD in Q1 2024 while its Cash and Cash Equivalents went up from 455,826 to 721,787 K USD, meaning a large portion of its short-term investments has matured. On the liability side, its Total Liabilities decreased from Q1 2023 figure of 1,849,385 K USD to 1,788,096 with most of the change stemming from decreases in the Accrued Compensation and Benefits item and the Deferred Revenue item.

Regarding free cash flow, the company has had its best quarter ever with Free Cash Flow of 51,765 K USD resulting in Free Cash Flow per share of 0.73 USD which annualized is 2.92 USD.

Valuation

Valuing a company like MongoDB is tricky, both due to its history of negative earnings and cash flows and operating in a high-growth industry. Nonetheless, with the Q1 2024 Total Revenue 368,280 K USD and its market capitalization of 29 B USD, the price-to-sales ratio is 19.6, indicating strong overvaluation on its own.

Using the Free Cash Flow per share figure 2.92 USD, a growth rate of 20 % in the first 5 years and 15 % in the subsequent 5, a discount rate of 8 %, and a terminal multiple of 35, one can arrive at a per-share value of 262 USD:

While a multiple of 35 seems demandable in a growth market like MongoDB’s, estimating the growth in the company’s financials is the tricky part as they are both operating in a growing market as well as taking market share. Assuming that the company’s strategy in taking over the market will be successful, one can assume even higher growth rates in its free cash flow of 30 % in the first 5 years and 20 in the 5-10 next years:

Which amounts to a share price of 467 USD, only 13 % higher than the current market price of 413 USD, meaning this seems to be what the market is assuming will happen.

Risks

While a promising market, MongoDB faces substantial competition from other database providers such as IBM, Microsoft, Oracle, Amazon, and Google. Especially Oracle was a trailblazer in the 1970s, spreading the use of relational databases which stores data in rows and columns and not in so-called documents such as MongoDB’s. While Oracle was a pioneer back then, MongoDB’s offerings scale better with its horizontal scaling option than Oracle’s traditional databases, making them cheaper for today’s needs.

With winds blowing in favour of noSQL databases such as MongoDB’s, in 2011, Oracle released their first version of the non-relational database, 2 years after MongoDB released their offering. Although lots of non-relational database systems have entered the market, MongoDB was recently named a 2022 Leader in the cloud database management system market by consulting firm Gartner .

Another risk is a recession which would impact customers’ willingness to pay for IT services, thus lowering MongoDB revenue. Another considerable risk is that of technological innovation or, that other, more promising solutions might outcompete MongoDB’s offerings. This can work both ways for MongoDB.

Conclusion

While MongoDB’s financials and market position indicate an exciting investment, it is advisable for conservative investors to wait for substantially lower prices before taking a position in this company unless one truly believes in MongoDB as the winner of the high-growth Data Management Software market. While the company has a record of increasing Total Revenue, it also has had many years of negative earnings and free cash flow. Other risks include fierce competition from other large IT companies and potential economic headwinds.

For further details see: