Summary
- MongoDB shares were crushed in after-hours trading, following Q2 FY '23 results that included weak guidance.
- While some investors may view recent price weakness as a buying opportunity, I present 5 points suggesting a more cautious stance.
- With an opportunity base that may be smaller than promoted by management, I find it difficult to justify MDB as a long-term play.
MDB Stock - $500/Share Once Upon a Time
2022 has not been MongoDB’s ( MDB ) year. The stock closed above $500/share at the end of 2021, and was already down over (30%) year-to-date (“YTD”) before today’s Q2 FY ‘23 earnings announcement.
Figure 1: MDB and Selected Competitor Performance (Yves Sukhu)
Notes:
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Data as of market close 8/30/22.
Q2 FY ‘23 results included guidance below analyst estimates and shares are down ~(16%) in after-hours trading as I write this. With shares likely trading well below $300/share tomorrow, I imagine there may be some investors who might see the stock as attractively valued, at least relative to where it started the year.
Figure 2: MDB Stock Price Performance (Yves Sukhu)
Notes:
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Data as of market close 8/30/22.
MDB, without question, has done something remarkable with its business and technology, growing revenues from $65.2M at the end of FY ‘16 to $873.8M at the end of FY ‘22, reflecting a robust CAGR of 53.8%. And sales continue to climb, with net sales of $303.7M in Q3 FY ‘22 reflecting 53% QoQ growth.
Impressive sales growth aside, I think there are some things investors should keep in mind before putting their money into the stock, even with the pullback.
A Qualitative View On MongoDB
There are excellent MDB analyses, particularly those found here on Seeking Alpha, that focus on more quantitative aspects of the company (e.g. margin growth, valuation, etc.); and I would encourage readers to take a look at those. Here, however, I wish to focus instead on 5 qualitative points.
1. MDB’s total addressable market (“TAM”) may not be quite as large as you think.
MDB’s annual reports regularly reference statistics about the size of the overall database market, implying a sizable market opportunity for their technology. They note in their Annual Report FY ‘22 that “[the] database market is one of the largest in the software industry. According to IDC, the worldwide database software market, which [IDC] refers to as the data management software market, was forecast to be $74 billion in 2021 growing to approximately $121 billion in 2025, representing a 13% compound annual growth rate.” Sounds good, right? Bear in mind that the database market can be (generally speaking) split into two major sub-markets based on the technology used by the database: relational and non-relational. MongoDB, which is a document-based database, slots into the non-relational market, which itself can be further subdivided based on technology, including key-value stores, document databases (e.g. MongoDB), and graph databases. So, just how big is the non-relational market, also sometimes referred to as the NoSQL market? Expectedly, there are any number of estimates; although here is one :
Figure 3: Non-Relational Database Market Forecast (Verified Market Research)
I can’t say if the data from this single source is accurate. However, my general point is that it could be argued that MDB’s insinuation that the entire database market represents fertile hunting ground for the company is a bit misleading. The counter-argument to my assertion is that MongoDB’s architecture, which was designed to offer some of the benefits of relational systems, is therefore able to “attack” opportunities within the traditional relational database market. Indeed, management noted in their Annual Report FY ‘18 that “...approximately one quarter to one third of our new business resulted from the migration of applications from legacy databases.” However, I would caution investors on betting too much on the overall database market size as it, I think, does not accurately quantify MDB’s runway. Establishing a precise TAM for the company is incredibly difficult; and I remind readers of the following boiler-plate language in the company’s annual reports :
This Form 10-K contains market data and industry forecasts that were obtained from industry publications. These data and forecasts involve a number of assumptions and limitations and you are cautioned not to give undue weight to such information. We have not independently verified any third-party information. While we believe the market position, market opportunity and market size information included in this Form 10-K is generally reliable, such information is inherently imprecise.
While MDB undoubtedly enjoys a TAM of several billion dollars, realistically, their actual market opportunity must be significantly less than what is offered by the entire database market.
2. Even with the stock slammed in after-hours trading, MDB’s market cap reflects a large proportion of the estimated non-relational database market size.
Assuming the forecast in Figure 3 is accurate, and I don’t know that it is, MDB’s market cap of ~$18.5B – which factors in today’s after-hours ~(16%) drop – is nearly ~75% of the projected value of the entire non-relational database market of ~$25B in 2027. We recognize then, again assuming the market estimate is accurate, that investors are assigning a rather high valuation to the firm – although I assume that is hardly “news” to readers. Now, we can help justify MDB’s valuation using my counter-argument that the company also has a strong opportunity in the relational database market, as expressed in the previous point. Further, the data in Figure 3 may simply be wrong; and the non-relational database market size is currently much larger than implied, and will grow faster than expected. But, I think the firm’s market capitalization in the context of what may be considered its more realistic market opportunity should at least elicit some questions from prospective investors.
3. MDB’s technology is not necessarily a good fit for all database use cases.
As hinted in the first point, different database technologies exist because no single technology is a perfect fit for every use case. Relational database systems are well-suited for online transactional processing ("OLTP") applications which are characterized by structured data and fast response time. For example, your ATM almost certainly interacts with a backend relational database to verify your PIN number, check your account balance, etc. Graph databases are useful when relationships among a large number of entities must be captured, as with social networking graphs. Document databases, like MongoDB, are perfect for the storage and analysis of large amounts of unstructured data. Accordingly, we might think of each database technology having its particular "sweet spot". Leveraging my earlier example, it is not out of the question to build an ATM application with a MongoDB backend. But, it might be -- as the saying goes -- "trying to push a square peg through a round hole". It simply may not be the right tool for that particular job. However, this idea also plays into MDB's story. In the past, applications, which were not particularly well-suited for relational databases, may have been built on top of relational databases nonetheless because there was no other technology available. Today, these older applications which might be better suited to a document store, like MongoDB, can thus be modernized. Hence why MDB has been able to derive a significant portion of its revenue from the migration of legacy applications. So, this point cuts both ways for the company. But, investors would be remiss to think that MongoDB is a "one-all-be-all" replacement for relational database systems.
4. MongoDB is facing competition from every angle you can think of.
The database market is very crowded. There are legacy players like Oracle ( ORCL ), Microsoft SQL Server ( MSFT ), and IBM DB2 ( IBM ). Then, of course, there are newer, cloud-based technologies like MongoDB, Snowflake ( SNOW ), Amazon Redshift ( AMZN ), and Google BigQuery ( GOOG ). Beyond these "name brands", there is an almost innumerable quantity of other technologies; many, as suggested in the prior point, aimed at particular use cases. For example, Splunk ( SPLK ) is ideally suited for time-series based data, a use case area that MDB is attacking as well. Moreover, the company is hardly alone in terms of document storage. All the major relational database vendors support document storage as well, albeit perhaps with lesser functionality as compared to MDB which was designed from the "ground up" with a document based architecture. Overall, their moat may not be quite as wide as some investors are thinking. They will face increasing competition as time goes on with competitors working to close feature/function gaps. Of course, this is the nature of information technology. But, I would argue the database market is particularly competitive; and this will pressure MDB's top and bottom lines.
5. Legacy technologies might be inflexible and expensive, but they can also be very sticky.
A key part of MDB's value proposition is MongoDB's ability to serve as a more flexible, lower-cost database system versus traditional relational technologies. That may be so. However, as I've noted in prior articles, technologies basically become religion within customer environments. And readers already know how "easy" it is to change someone's religion. An effort to replace a relational database system that has been operating for years, or in some cases maybe even decades, is likely to be met with fierce resistance - even if MDB has a clearly superior offering. This means sales cycles can be very long and very complicated, which in turn introduces risk for investors. Surely, MDB has done a good job navigating this dynamic thus far. But, time will tell if they can sustain/grow the proportion of their business driven by legacy migrations.
My Take
Personally, I find it difficult to justify MDB as a long-term play. I see the business as offering too many risks relative to its high valuation. As suggested in other articles, the stock may make for a good trading vehicle; but, I think in long term this is a company whose shares are due to "come back down to Earth".
For further details see:
MongoDB: A Qualitative View Following Q2 FY 2023 Earnings