Summary
- Now down more than 60% over the past year, MongoDB has sunk below my target purchase price.
- MongoDB demonstrates tremendous growth at scale, able to grow revenue at a mid-40s pace despite a >$1 billion revenue scale.
- The company's unstructured database products enjoy secular tailwinds from the explosion of big data.
- It has largely grown organically and has not been particularly acquisitive, but its nearly $2 billion of cash gives it ample financial flexibility.
- Trading at just 7x forward revenue, MongoDB has hit a multi-year low in valuation.
What I have enjoyed most about the deep bear market in tech stocks over the past few quarters is that stocks I once thought to be untouchable due to sky-high valuations have come back down to earth. Now is the exact right time, in my view, to be biasing our portfolios toward these names.
MongoDB ( MDB ) is a big standout here. Long a Wall Street favorite since its very popular IPO in 2017 at a mere $22 per share, this unstructured database giant (which has styled itself as an Oracle-killer) has shed more than 60% of its value over the last twelve months. Now is an excellent time to assess the damage to this name and salvage the pieces.
In my prior article on MongoDB in September, I was previously neutral on the stock and recommended that investors wait until the stock crossed below a $215 threshold to buy. The precipitous decline in MongoDB (as well as the rest of the tech sector) has given us a major gift here, and I am now fully bullish on MongoDB.
This, to me, is the core bullish thesis for MongoDB:
- Growth at scale. Very few companies that have reached a >$1 billion annual run rate are still growing revenue north of >50% y/y, and MongoDB is one of those few. That's a testament to the all-encompassing, horizontal nature of MongoDB's product. Almost all companies now have a use for managing unstructured data, and its technology is broadly applicable across a wide variety of use cases.
- Secular tailwinds. More and more these days, companies and brand marketers want to capture consumer data coming from "unstructured" sources - Tweets, social media posts, and the like. Traditional databases which store data in a columnar format are not equipped to handle this. MongoDB's generous growth rates are a reflection of the largesse of the company's space.
- Rich gross margin profile. MongoDB's >70% gross margins give the company the elastic scalability that we look for in software investments. The company spends heavily to acquire customers, but once locked in, these high-margin recurring revenue contracts provide a steady stream of income for years to come, as opex naturally levers and generates economies of scale. Already, the company has generated healthy operating income from a pro forma perspective.
- Substantial cash balances. MongoDB has largely charted its growth to a >$1 billion revenue scale on an organic basis. It has not engaged in earth-shaking M&A deals like many of its software peers. Down the line, the company's $1.8 billion of balance sheet cash gives it plenty of financial flexibility to pursue this growth route if it chooses.
Despite these strengths, MongoDB trades at what I would now consider to be quite a bargain valuation. At current share prices near $171, MongoDB trades at a market cap of $11.94 billion. After we net off the $1.79 billion of cash and $1.14 billion of convertible debt on MongoDB's most recent balance sheet, the company's resulting enterprise value is $11.29 billion.
Meanwhile, for the upcoming fiscal year FY24 (which for MongoDB is the year ending in January 2024), Wall Street analysts have a consensus revenue target of $1.58 billion for the company, representing 25% y/y growth (data from Yahoo Finance ). Do recall that MongoDB's growth rates at present are hovering in the high 40s, so this already seems like a de-risked estimate. At face value against consensus expectations, MongoDB trades at just 7.1x EV/FY24 revenue. At its peak during the pandemic, MongoDB traded at a mid-20s revenue multiple: and while I don't necessarily see MongoDB ever touching those heights again, I do think the company's combination of growth at scale plus path to breakeven profitability merit at least a low-teens revenue multiple.
The bottom line here: if you've been waiting to buy MongoDB, this is your chance.
Q3 download
Let's now go through MongoDB's latest terrific Q3 results in greater detail, which the company released in early December. The Q3 earnings summary is shown below:
MongoDB's revenue grew 47% y/y in the quarter to $333.6 million, beating Wall Street's expectations of $304.7 million (+34% y/y) by a huge thirteen-point margin. Growth did decelerate, however, from 53% y/y growth in Q2.
Note as well that MongoDB also has a very high subscription revenue mix of 96%, whereas most other software companies have a 10-15% mix toward lower-margin services. MongoDB performs services below cost, so it's favorable that this piece of the business dwindles / is off-loaded to third-party partners as MongoDB scales.
The company notes that sales execution performed well in the quarter, partially offset by somewhat weaker consumption trends on the company's self-service Atlas product (which recognizes revenue according to consumption levels, which can vary as macro and business conditions change). Per CEO Dev Ittycheria's remarks on the Q3 earnings call :
Overall, we are pleased with our performance and execution in Q3 despite the challenging macro environment.
Let me give you a bit more context on what we saw in Q3. We had another strong quarter of new business. We added over 500 direct sales customers, and we keep winning new workloads in existing accounts from start-ups to Fortune 500 companies. Our new business from Enterprise Advanced also significantly exceeds our expectations, which is particularly notable in this environment given that EA requires an upfront commitment.
Turning to Atlas consumption trends. We have seen an improvement in Q3 versus Q2, albeit still below historical levels. Michael will cover this in more detail. Finally, retention rates remained very strong in Q3, demonstrating the mission-criticality of our platform."
The company noted that net revenue expansion rates remained north of 120% - so in spite of potential consumption headwinds in Atlas (driven by mid-market and smaller customers), MongoDB is still achieving high average upsell rates across its client stack.
Pro forma gross margins also ticked up to 74% in the quarter, owing to economies of scale:
Pro forma operating income also jumped to $19.8 million, more than a 3x increase over $6.3 million in the prior-year Q3. Pro forma operating margins, meanwhile, clocked in at 5.9%, 310bps higher than 2.8% in the year-ago quarter.
Key takeaways
It's important not to forget as well that with a high 40s growth rate on top of a mid single-digit pro forma operating margin, MongoDB is a comfortable member of the "Rule of 40" club. Its ~7x forward revenue valuation, in my view, has substantial headroom for expansion. Now is the time to buy this stock.
For further details see:
MongoDB Has Hit My Buying Threshold