MDB - We Banked The Free Money From MongoDB

2023-06-27 09:03:13 ET

Summary

• MongoDB stock has been on a tear during 2023, up over 80% since our Buy note of March 9.
• We recently sold all our MongoDB holdings in staff personal accounts, since free money is free money.
• We think the stock can continue to move up medium term, but markets are faltering a little and there is never any harm in banking gains.
• We rate at Sell for the purposes of this article (and indeed for our own personal account purposes); if you have a longer-term perspective, it is reasonable to continue to Hold, in our view.

DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.

Investor, Know Thyself

The most fun we have in our business is writing Buy notes when stocks are on the floor and digging toward the basement (but could, of course, go lower), and writing Sell notes when stocks have mooned (but could, of course, go higher). The howls of protest provoked by both types of note is wonderful to see. Witness our recent commentary on Palo Alto Networks (PANW), here .

MongoDB (MDB) was actually in the basement for much of 2022 but started to pick up as the company started to become consistently profitable and cash generative. That alone ought to have set the stock on a course for slow accumulation by large account players, with a more substantial move up in a year or two.

But then AI happened. Which led to this :

If we think of AI systems as just computer systems that need a lot more, er, computing, then we can say with some certainty that (1) AI systems will become more prevalent in the enterprise (2) unit demand for memory, storage, processing power, comms throughput, etc. will rise accordingly. So it is highly likely that the adoption of AI into mainstream computing will, as it slowly takes place, drive demand for database products like those from MongoDB. However, the re-rating of MDB stock has likely run very quickly ahead of that actual unit demand for product, and when that happens to a stock you own, you have to look yourself in the eye and ask, what am I doing here? Why do I own this thing?

Some good reasons to own stocks are:

• You bought them for the dividend and it is getting paid nicely, maybe rising, and the stock itself isn't so volatile that it worries you about losing more capital then you get in income.
• You bought them when Big Money was buying them, at the same time that Big Money was telling everyone watching CNBC to sell stocks because, you know, recession and Fedzilla and all, and you are pretty sure Big Money is going to bid the thing up so you can collect a little free money down the line by selling before Big Money effects the Rug Pull.
• You bought them because you believe you own a long-run secular play which will become a dominant player in its sector, ergo the price today has no bearing on the price in a decade's time, you don't need the money and you believe everything that asset managers tell you about the benefits of letting them manage your assets i.e. never sell.

Amongst the many bad reasons to own stocks are:

• This one is special and I am gonna HODL Till The Moon!

When stocks make moves like MDB just did, it's worth thinking hard about why you own it. Because the company is quite special and it is absolutely possible that in twenty years it looks something like Oracle does now, which is to say old and tired but printing all time highs in its stock, because Larry. So if you don't need the money, you are truly turning your retirement account into Omaha 2.0 (and actually succeeding at it, not just telling yourself that compounding will turn around your losses), and you think MDB is a long run winner? Then it's a Hold rating for you, naturally. Heck, you may even be buying more because if you look at that chart, you could most certainly convince yourself that it is printing a pennant or a bull flag or something of that ilk.

On the other hand it is up 80% since March. It's now June. And there is the whiff of a geopolitical event afoot in Russia. So you might care to do what we did in our own personal accounts and say, I think I shall take the money back to the bank, thank you and goodnight.

For the purposes of this article we rate the name at Sell, because we see this note as closing off the Buy note of March 9. And we aren't trying to be heroes here, just want to click in the wins. The Sell rating is arrived at through three factors:

• A macro environment which whilst not negative, could become so, given the Russia situation, the post-debt-ceiling US government situation, and the potential rotation of Big Money out of already run-up growth names and into still-in-the-basement value names.
• The rapid elevation of the valuation multiples.
• The straight-up nature of the chart.

You'll note that our chart shows MDB as being still in our 'Markup Zone' meaning we think that Big Money is likely to hold for some time, now with new all time highs in view. So whilst we may sound flippant as regards to holding longer, we aren't. (We have resting flippant face. Excuse us). Again, you just have to know yourself and know why you own the name.

Fundamentals

MongoDB delivered a solid recent quarter - beat on revenue and continued to demonstrate a path to sustained EBITDA and unlevered pretax FCF growth. The guide for next quarter is for 1% deceleration, from +29% revenue growth this quarter vs. PY to +28% for Q2E vs. PY. Now, in recent quarters, MDB has beat its guide every time; they only have to beat by a little in Q2 to deliver an accelerated growth rate, which of course is an argument to continue to hold the name.

Valuation

Note, the EBITDA and UFCF valuation multiples are clearly ridiculous at present - for now this name will continue to be valued on a revenue basis but in time the profit and cashflow metrics will come to matter.

19x TTM revenue is punchy to say the least.

Chart

OK, so, three charts actually.

First up, here's the larger degree chart that argues to hold for the longer term. You can open a full page version here .

If you look at the volume profile - the gray bars on the right hand side showing volume x price - then you can argue that the stock is climbing up above the last high volume node and thereafter could move up quickly, since the inventory-for-sale of stockholders above that price is likely to be low, ergo, low resistance. The chart above has that volume profile clock starting at the Covid lows.

But, if you start the volume profile clock at the 2022 lows, you can see a volume spike at the current levels which is probably, but not definitely, profit taking. It's unlikely to be loading up buys at these levels, since the bigs already did all the buying from September 2022 - April 2023, as you can see from our Accumulation Zone. Open a full page version, here .

Finally if we map out a daily chart since the 2022 lows, here's what we find. (Full page version, here ).

A few observations on this short-term chart.

• The stock right now is sitting around the 2.618 extension of the prior Wave 1, which is a common level for extended Wave 3s to terminate and reverse.
• The gap below is yawning and such gaps are often filled; the lower end of that gap coincides with a sensible Wave 4 retracement level, being 50% of that big Wave 3 up.
• Projecting a standard Wave 5 up thereafter gives as a near term price target of maybe $470, after a drawdown.

So, we took the money (after alerting our Growth Investor Pro members that we were going to place the trade, as normal). We may add back if we get that Wave 4 down, but we'll take a look at the time and have no hard and fast plans.

Sell rating for now; but read all the above to get the color on that.

Cestrian Capital Research, Inc - 27 June 2023.

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