2023-03-11 02:49:43 ET
Summary
- MongoDB has continuous growth in its revenue and gross profits.
- However, its financing and investing activities greatly influence its net cash flow.
- Its investing proceeds have far exceeded the earnings from operations, which is an ongoing widening loss.
- The management invests capital that is almost equivalent to its annual revenue in the U.S. treasury and other fixed-income products while leaving its net income losses growing.
Investment Thesis
MongoDB's financial statements are highly financialized, with financing, and investing activities dominating its net cash flow, and financial investments in short-term US treasury higher than its annual revenue. We are puzzled by this and recommend a strong sell.
Company Overview
MongoDB Inc, formerly 10gen software, is the developer of their main product offering - MongoDB, a source-available cross-platform document-oriented database program. The company uses an open-source development model while offering commercial support and other services on top of that. It is a global company with US headquarter in New York City and worldwide headquarter in Dublin, Ireland.
Strength
MongoDB describes itself as a DaaS (Data as a service) tech company. The company offers customers an on-premise enterprise version and a free-to-use community version. Two of the standout advantages of MongoDB are that it's document-oriented and cloud-based. Its MongoDB Atlas nonrelational database is available on AWS, Azure, and Google Cloud Platform. The company has maintained strong growth in revenue and gross profit.
It was able to make it into the Leaders category in Gartner's Magic Quadrant for the 2022 Cloud-based database ranking.
However, we would like to go directly to what we see as most puzzling.
Weakness/Risks
MongoDB's free cash flow is only slightly below zero, but its net income and EBITDA are solidly in negative territory. They all have slightly improved in the latest quarter, but the overall hasn't changed.
Why the negatives? Its operating expenses are basically equivalent to its revenue and far exceed its gross profit. The trend also seems to be the operating expenses are pulling away from the gross profit even further.
Certainly, a fast-growing tech company needs to burn cash to invest in its next-gen technologies.
But it doesn't seem to be the exact case for MongoDB. On the company's balance sheets and statements, it has financial assets that are much higher than its cash and cash equivalent. The amount of money it invests in financial assets, all of which are U.S. government treasury securities categorized as short-term investments, has far exceeded its cash and cash equivalent every year. This is not an occasional phenomenon but a strategic arrangement by its management. To put this in context, its latest annual revenue on TTM basis is $1.19 billion. This investment in financial assets is almost as large as its revenue. We are puzzled as to why MongoDB is putting so many resources into financial investments instead of investing in turning its earnings positive from the DaaS business operation.
The company's cash flow statement shows that its investment proceeds from maturities of marketable securities illustrated in the chart above have far exceeded its operating loss. The company was only publicly listed in 2018. So these four years of data can already paint a picture of how the company's management directs its resources for the business.
On a TTM basis, MongoDB's net cash flow has declined fast lately.
If we break down its net cash flow, the most significant jumps or declines come from its financing and investing activities in scale that significantly overshadow the operating cash flow. And the decline in last quarter's net cash flow can almost entirely be attributed to its decrease in cash flow from investing activities.
Indeed, cash available to invest on the side is much better than burning through the pocket with a hole. But unlike some businesses with some extra cash generated by the nature of the operation and reinvesting it in the financial market to generate a return, this extra cash of MongoDB isn't accumulated from robust positive cash flow from operation. And if MongoDB has all this cash on the side that can be invested in treasury bonds and notes, why not reinvest in its operation to improve the negative earnings or net income? Coming back to its high operating expense, the company spent north of 50% of its revenue on sales and marketing expenses. As a more pervasive trend, database functions have become integral to data science and AI. As Gartner pointed out, this is one of the weaknesses of MongoDB - it doesn't provide built-in modeling and algorithmic libraries to help speed up the data deployment. And challengers in the field, such as Reddis InterSystem or MarkLogic, provide comparable services but different vantage features. Simply put, why does a fast-growing tech company keep a financial portfolio that almost encompasses its annual revenue to earn fixed income instead of investing back into its tech development? Is it because the management believes the US treasury can generate a better return than its DaaS business?
Finally, here are the fundamental questions to ask, what are the investors actually buying in MongoDB if taking away the financial portfolio? And with more financial market volatility ahead, how will the company's cash flow weather the storm given this large financial portfolio? Some investors might say, a fast-growing tech company with lots of cash on the side, it's a great deal. Sounds not bad on the surface, but even if we take its full face value, is it worth paying a negative 89x price-to-earnings ratio for the fixed-income portfolio return plus negative operating earnings?
Financial Overview
Conclusion
We find it hard to give an effective fair value assessment for MongoDB as a DaaS company or a pure tech company, as its current financial investment portfolio largely overshadowed its negative free cash flow and earnings. They cannot justify its still lofty stock price. We will recommend a strong sell due to the ambiguity of where its long-term positive cash flow resides.
For further details see:
MongoDB: Outsized Financial Portfolios Overshadow Negative DaaS Earnings