2023-05-19 14:25:10 ET
Summary
- MongoDB trades at very high multiples that are 12x IT sector median for P/E and 17x IT sector median for operating cash flow (forward basis).
- Yet, it significantly outperformed consensus non-GAAP EPS estimates last quarter with a 657% beat against consensus estimates.
- Estimates for the upcoming earnings release for FQ1 2024 were adjusted less than 50% in response and may not fully reflect ongoing margin improvements in the business.
- As such, I think consensus is playing it safe and MongoDB could have another excellent quarter, which should lead to near-term appreciation in share price.
Overview
MongoDB (MDB) stock has had a good year and an especially good month. In the middle of its current bull run, it has now outperformed the NASDAQ Composite more than 2x YTD. While it appreciated earlier in the year in the wake of cloud results from the mega-cap technology companies , recent price action has occurred irrespective of any news. As the company is two weeks out from its next earnings release, June 1st, I thought it would be good to check in on the company and see how it may perform in the near term. I will contextualize my outlook by looking through the firm's historical financials, performance against consensus, and present valuation.
Financials
As with many other companies in the tech sector right now, MongoDB has made repeated mentions of pushing towards profitability and profitable growth. At present, however, it hasn't yet achieved this.
What it has been able to achieve is consistently excellent growth, which continued through the most recent quarter. While 35% y/y revenue growth may not be as high as some of the numbers MongoDB put up before, it is more than high enough for it to still be considered a very high growth enterprise.
This is continuing even as the firm has hit $1B in yearly revenue run rate as of its fiscal Q4 2022 (ending Jan 2022).
Gross margins have also remained robust. Last quarter's 75.32% gross margin was the highest in its history.
GAAP net income has nonetheless remained negative, although improving. The net income figure doesn't appear to closely track changes in the firm's gross margin, although this effect was apparent in its most recent quarter; a gross margin increase of 3.39% yielded a net margin increase of 7.61%. The quarter prior to that saw a significant 13.71% increase to net margin even as gross margin only moved 1%.
The story here is different for non-GAAP net income; the company posted $46.4M last quarter on this metric for a non-GAAP net margin of 12.8%.
Cash from operations has been too volatile to establish a trendline but was also a record figure last quarter.
Overall, these basic financials indicate exactly the kind of company that I want to see in the market today: high-growth and turning the corner on operating cash flow. Since software companies don't have inventory in the traditional sense, operating cash flow ends up being a strong indicator of eventual GAAP profitability. While the company is already profitable on a non-GAAP basis, it does have some ground to cover before achieving profitability on a GAAP basis.
Valuation
MongoDB is an expensive stock on a relative sector basis. Its forward non-GAAP P/E multiple is a sky-high 271.1, more than 10 times the sector median.
This is also reflected in its forward operating cash flow multiple, where MongoDB's multiple is 346.63 at more than 17x the sector median.
On a price return basis, the picture is more nuanced. Since MongoDB has consistently outperformed the NASDAQ Composite since its Q4 2017 IPO, we can't assert that it is cheap relative to index performance. Additionally, its previous high price point of $570 occurred while it had no earnings, meaning that we can't calculate a multiple for that period in order to compare it to the present. The only conclusion we can draw at this point is that MongoDB is cheap relative to itself historically on a pure share price basis.
Since MongoDB is technically a noSQL cloud database provider (unstructured data storage and processing via cloud), it makes sense to compare it to its closest competitor: Snowflake (SNOW).
Snowflake is trading even more expensively on a forward P/E basis, with a multiple of 293.42 - an 8.2% premium to MongoDB's multiple. Snowflake is however much cheaper on a forward operating cash flow basis, trading at a multiple of 110.7. This means MongoDB's forward operating cash flow multiple is at a 213% premium to Snowflake's at the moment. There is not a clear pattern to the relative valuations between these two firms.
Both companies have had a good year in terms of price performance, well outpacing the NASDAQ Composite. Here MongoDB has also appreciated beyond Snowflake.
Across these metrics, it is clear that MongoDB is expensive. As a growth stock, however, these valuations are not the end-all be-all for the stock. It has traded on the basis of its growth prospects and should continue to do so. Given the market's current eye on profitability, this factor should also begin to price in, but there is already clear consensus on non-GAAP profitability for this fiscal year as well as positive operating cash flow. As such, what should drive this stock in the next earnings report and throughout this year will be its ability to keep growing revenue and non-GAAP EPS in line with estimates. In the next section, I'll briefly review the stock's performance against consensus and evaluate how this may reflect on its prospects for the near-term.
Performance Against Consensus
While consensus for non-GAAP EPS appears to have been mostly on-the-money for the last 8 quarters, the most recent quarter saw MongoDB crush expectations with a 657% beat against expectations. A statistically abnormal earnings beat such as this one can indicate that consensus has to 'reset' itself in order to become more accurate and predictive again. This usually takes at least a few quarters. As such, I think there is an elevated probability that next quarter's consensus estimates could again be well off the mark.
In the wake of this consensus beat, consensus EPS has been revised significantly for the upcoming quarter, to $0.19 per share non-GAAP EPS. This was moved up from $0.13 prior to the latest earnings release, a 46.2% increase. This current figure nonetheless represents an expected 4.96% decrease in non-GAAP EPS y/y.
Last quarter's non-GAAP EPS of $0.57 came along with 35.57% higher revenue y/y as well as an (absolute) net margin improvement of 13.87%. While these are GAAP numbers, we will assume that the relative change between them roughly holds for non-GAAP numbers. This means that 1.36x the revenue at 1.14x the net margin y/y together yielded non-GAAP EPS of $0.57, a y/y absolute increase of $0.66 (from FQ4 2022's EPS of -$0.09).
These appear to be sensible assumptions to carry forward because the firm has had 3 quarters of steady margin improvement. Given the focus on profitability, I am expecting these to be durable. Additionally, growth of 35.57% is actually lower than what we saw before y/y and could decline further, but I am assuming that it will hold up at roughly this level.
Additionally, the absolute gain in EPS is a sensible relative metric to use because it is a number constrained by the overall size and margins of the business. It can be considered a proxy for the company's 'return on operating leverage', or basically much total additional total margin the firm was able to generate y/y between quarters.
Assuming this same level of marginal performance improvement for the upcoming quarter, we would arrive at an EPS estimate of $0.86 by adding $0.66 to the previous year's FQ1 EPS of $0.20.
We can then rationalize this (bring closer to statistical mean) against consensus by adding $0.86 to consensus estimates of $0.19 and dividing by 2, thus creating a midpoint between what last quarter implies and what consensus is saying. This yields a figure of $0.53, which I'll round down to $0.50 y/y.
I am expecting non-GAAP EPS of $0.50 per share for MongoDB's FQ1 2024 quarter. This would represent an outperform against expectations that should yield further share price appreciation given the recent trading momentum.
Risks and Conclusion
The main risk here is if y/y revenue growth comes in much lower than last quarter's. This would decrease the extra margin that the firm would have generated and result in a much lower number. Given ongoing pressures in the B2B technology sector, I wouldn't discount this possibility. Additionally, we must remember that MongoDB is trading at very high multiples and could experience a sell-off that brings it closer to sector norms. With those caveats, I think MongoDB looks like a good buy heading into earnings.
For further details see:
MongoDB: EPS Growth Momentum Heading Into Earnings