2023-04-11 08:16:38 ET
Summary
- MongoDB's cloud platform, Atlas, now makes up nearly 70% of the business. And this unit is delivering very strong growth.
- However, even with heroic assumptions, its profitability profile leaves a lot to be desired.
- Paying more than 200x forward non-GAAP EPS for a business that's clearly not growing anywhere near fast enough to support this valuation, poses a problem.
Investment Thesis
MongoDB ( MDB ) is very well positioned for massive growth in data volumes. Its cloud-based Atlas platform now makes up nearly 70% of its total business. Further, as more and more customers adopt Atlas, enterprises' consumption patterns naturally scale up, which drives strong and sustainable growth rates for MongoDB.
However, the problem with the investment case is that the stock is just so expensive.
When interest rates were close to 0%, MongoDB's valuation didn't matter. But today, with interest rates likely to stay somewhere around 4% to 5% for a while, paying more than 200x forward non-GAAP EPS simply doesn't leave much upside potential for new investors to the name.
Why MongoDB? Why Now?
MongoDB is a general-purpose database platform. MongoDB allows users to contextualize and operate through unstructured data. Even though I know that the bulk of MongoDB's shareholders are developers, let me unpack this in plain English.
MongoDB is a fully scalable database. As businesses insert data in different formats, MongoDB allows customers to store their data as its databases are "always on".
MongoDB allows customers the ability to interact across a time series, with analytics, and crucially search through their workloads.
All that being said, we can get caught up in a compelling narrative as much as we want, but the fact of the matter is that MongoDB's growth rates are slowing down.
Revenue Growth Rates Are Slowing Down
Let's cut to the chase, I fully recognize that MongoDB nearly always guides conservatively and then delivers a very strong topline beat.
With each quarter MongoDB beats revenue consensus estimates by at least mid-single digits. Consequently, rather than getting caught up with its fiscal Q1 2024 guidance of mid-20s% CAGR we should immediately think of at least the high-20s% CAGR.
Nevertheless, that figure would still be at less than half the growth rate that MongoDB reported in fiscal Q1 2023. So, we can firmly and decidedly agree that MongoDB's revenue growth rates are slowing.
That being said, keep in mind that H1 2024 is the most challenging comparable period. Indeed, once we get past fiscal Q1 2024, with each passing quarter, the comparable periods rapidly become easier.
So, if MongoDB can be relied upon to grow in fiscal Q1 2024 by let's say, around 26% y/y, that will probably mean that fiscal 2024 as a whole will end up reporting the high 20s% to maybe as much as 30% CAGR.
In sum, MongoDB is still very much a growth stock. Even if its growth rates are clearly slowing down.
Further Positive Considerations
MongoDB finished fiscal 2023 with non-GAAP operating income margins of 4.8%, while its guidance for the year ahead at the high-end points to approximately 5.5% non-GAAP operating margins.
In fact, during MongoDB's earnings call , management called out,
In terms of our operating income guidance, the key variable to keep in mind is our headcount growth, as Dev mentioned, we'll meaningfully slow down hiring this year, expecting to grow headcount in the single digits. However, in terms of year-over-year OpEx growth, keep in mind that we'll also be annualizing the impact of the 30% headcount growth we experienced last year.
And then going on to elaborate during the Q&A section of the call,
I mean, we are basically making decisions across the business and in a surgical way. This is not some sort of broad-based slowdown. We're investing in channels and markets where we see great performance and we're slowing down that pace of investment in areas that maybe we're waiting for things to get better.
Essentially MongoDB believes that given a slowdown in its near-term prospects, while the company waits for the macro environment to ease up, it's probably better to reduce some of its operations expenditures and hires in order to improve its bottom line prospects.
MDB Stock Valuation -- More than 200x Forward Non-GAAP EPS
The problem with investing in tech companies is that we must turn a blind eye to stock-based compensation. Or put another way, we have to pretend that management decided to work for free and that stock-based compensation isn't a real cost.
Once we all agree on the above paragraph, then, MongoDB is priced at slightly over 200x forward non-GAAP EPS.
Is MongoDB's bottom line truly growing at more than 100% y/y that we can in any way justify this valuation? I don't believe so. In the absolute best case, MongoDB's bottom line is perhaps growing at 45% y/y, making it a challenge for me to justify paying such a premium on its stock.
The Bottom Line
Investors are likely to remain enchanted with MongoDB's Atlas prospects. But investors better not move beyond the topline and start to question MongoDB's bottom line profitability, because there they'll be disappointed.
Nevertheless, for now, the stock appears to have found a bottom, so I don't believe that investors will be too concerned with its rich valuation. But at some point, investors will start to once again question its unappetizing profitability profile. And that will cause problems for the stock once more. In conclusion, I believe there are better opportunities in tech elsewhere.
For further details see:
MongoDB: Awesome Financials, But So Expensive