2023-04-11 13:11:53 ET
Summary
- Shares of MongoDB have rebounded >10% year to date, though momentum has been choppy since the company reported Q4 results and issued FY24 guidance.
- The company notes that unlike many software companies, the macro environment has not impacted MongoDB's ability to generate new business.
- However, the company has noticed a slowdown in consumption trends, hurting its revenue growth and prompting its outlook of deceleration to high-teens growth in FY24.
- MongoDB isn't cheap, but with low reset expectations, the company likely has room to rise to the ~$240 level before cooling back down.
When the markets are as volatile as they are today, investors should be careful to diligently monitor every position in their portfolios. Valuations and fundamental stories are changing daily, and the best way to beat the markets this year is to take an active stance.
MongoDB ( MDB ), for me, has been a fortuitous trade this year. I entered into the position in the $170s earlier this year, and the stock has since been the beneficiary of a generous tech rally as multiples re-rated upward. Recently, however, on the back of a Q3 earnings report that featured a cautious FY24 outlook, as well as renewed pressure on valuations owing to persistently high interest rates, MongoDB has entered into a stretch of volatility.
The question for investors now is: Does MongoDB still have room to rally higher, or is it time to lock in gains? I remain bullish on MongoDB, but I have put the stock on my "chopping block" list and I'm ready to sell on the next breakout.
Fundamentally, MongoDB remains sound. The company is still exhibiting >30% y/y growth even after hitting a >$1 billion scale in revenue. It recently signed a broad five-year partnership with Microsoft Azure that will bolster its go-to-market efforts. It's deepening its FedRAMP authorizations, which enable it to sell to the federal government and its various agencies (as seasoned software investors are aware, government deals often represent among the most lucrative deals in the industry).
Here's my full long-term bull case 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.
Here's the risk, of course: Do we believe MongoDB's outlook? The company revealed that at the end of Q4, the company saw lower usage trends. Historically, Q4 did see softness in consumption owing to holiday seasonality, but MongoDB noticed that the dip was more pronounced this year - which weighed on the company's outlook.
For the upcoming fiscal year FY24 (the year for MongoDB ending in January 2024), the company has guided to $1.48-$1.51 billion in revenue, which represents a growth range of just 15-18% y/y - a huge blow for a company that exited Q4 at a 36% y/y growth rate.
The bright side here is that MongoDB has a history of guiding conservatively - and I think that with lowered expectations, MongoDB has a good shot at initiating a "beat and raise" cadence this year and continuing to inch upward.
From a valuation perspective, at current share prices near $211, MongoDB trades at a market cap of $15.01 billion. After we net off the $1.84 billion of cash and $1.14 billion of convertible debt on MongoDB's most recent balance sheet, the company's resulting enterprise value is $14.31 billion.
This puts MongoDB's valuation at 9.6x EV/FY24 revenue - which certainly isn't cheap, especially in this high interest-rate world.
However, MongoDB has had a long history of elevated premium multiples owing to its combination of strong growth, unique product that has few direct competitors in the market and above-breakeven pro forma profitability. In my view, MongoDB can still rally up to 11x FY24 revenue, representing a price target of $240 and 14% upside from current levels.
The bottom line here: I'm cautiously monitoring my MongoDB position for an exit, but I'm holding out until the ~$240 range until locking in gains.
Q4 download
Let's now go through MongoDB's latest Q4 results in greater detail. The Q4 earnings summary is shown below:
MongoDB's revenue grew 36% y/y to $361.3 million, beating Wall Street's expectations of $337.9 million (+27% y/y) by a huge nine-point margin - hence my previous statement that MongoDB has a tendency of guiding its own internal expectations as well as Wall Street's quite conservatively. Growth did, however, begin a declaration trajectory vs. 47% y/y growth in Q3.
The company grew customers by 1.7k in the quarter to land at 40.8k total customers, up 24% y/y. Direct channel customers hit an all-time high at 88% contribution to subscription revenue, as MongoDB continues to focus on efficient go-to-market operations.
The company noted that unlike many other software peers, the soft macro climate has not impacted MongoDB's ability to win new business (whereas many other companies have reported higher scrutiny on deals, elongating approval cycles and pushing out close times). However, usage trends started to drop at the end of Q4, which is driving MongoDB's cautious outlook for FY24.
Per CEO Dev Ittycheria's remarks on the Q4 earnings call :
We had another strong quarter of new business acquisition, adding approximately 500 net new direct sales customers and we continue to have success in new workloads in existing accounts. Unlike many of our peers, we have not seen the macro environment impact our ability to win new business.
We believe this is due to a combination of the mission criticality of our platform, strong ROI and the excellent job our go-to-market teams have done navigating incremental hurdles and approvals in sales cycles.
Turning to Atlas consumption trends. Q4 was below our expectations. In our Q3 call, we told you we got off to a solid start to Q4 and that we had expected to see a usage-driven holiday slowdown in the back half of Q4. This slowdown did happen, but it was more pronounced than we had anticipated impacting our Q4 results as well as our outlook.
Consumption growth in February improved relative to December and January and was broadly in line with the average growth we've seen since the macro slowdown began in Q2 of last year."
It's encouraging to note, however, that consumption growth in February was stronger than in December and January (potentially alerting us to the fact that MongoDB's outlook is based on a worst-case, can't miss extrapolation of December trends that were impacted by one-time factors). MongoDB notes as well that customer retention remained high.
Note as well that pro forma operating income nearly tripled to $37.1 million in the quarter, representing a 10% pro forma operating margin versus just 5% in the year-ago quarter.
Key takeaways
In my view, given MongoDB's conservative approach to guiding FY24 and the company's own history of handsomely beating expectations, I think MongoDB still has room to rise through the next earnings cycle. Keep a close eye on its enriching valuation, however, and be prepared to let go around $240.
For further details see:
MongoDB: There's Still Upside Left