MongoDB Stock: More Metrics Needed for Investors
Wherever there are competing software solutions, you’ll find loyal tribes. Engineers are technically competent, so they’ll usually articulate their arguments in a convincing matter. Linux is obviously better than Windows, Apple is the best platform known to man, NoSQL will never displace SQL, and the list goes on. Debating the technical merits of competing technologies creates noise for investors. Oftentimes, forums like Reddit will incubate a small group of people who consume every technical detail they can find and regurgitate it back to fellow investors who “didn’t do their due diligence.” Usually, this behavior is associated with pre-revenue companies that need to convince investors someone is willing to pay for their product and service. (AST SpaceMobile anyone?)
Our recent piece on Investing in the Explosive Growth of Unstructured Data prompted quite a few people to question the overly optimistic picture we painted of NoSQL as a potential way to play the growth of unstructured data and AI. Today, we’re going to vet the leader in NoSQL – MongoDB (MDB) – according to the same criteria we use to evaluate all software-as-a–service (SaaS) companies.
Our database is built on the document model. We believe that the document model is the best way for software developers to work with data, as it is flexible and maps to how developers think and code. The document model is a superset of all other data models, which makes our database applicable to the broadest range of use cases.Credit: MongoDB
You may wonder why we’re not waiting a few more days until MongoDB Fiscal Q2-2023 results are released after the U.S. financial markets close on Wednesday, August 31, 2022. You may also be wondering how it’s possible a company is reporting earnings for a time period in the future. That’s because some deranged lunatic thought it was a good idea to let companies make up their own calendar year. It’s said this was done to account for seasonality in some industries, but the reality is that it confuses everyone, and whoever came up with the idea should be taken out back and shot.
We always like to analyze a stock ahead of earnings to decide whether it’s a business we want to hold in our tech stock portfolio and at what valuation. Then, when short-sighted analysts punish the firm because they failed to meet whatever lofty expectations said analysts created using arbitrary valuation models, we can scoop up some shares on the cheap. Based on a market cap of $22.6 billion and annualized revenues of $285.45 million, MongoDB has a simple valuation ratio of around 20. Here’s how that compares to a handful of SaaS firms taken from our tech stock catalog.
|Asset Name||Primary Ticker||Nanalyze Valuation Ratio|
The most highly valued SaaS firm out there is probably Snowflake, and we recently talked about why we’d go long at a ratio of 20. Seeing that they’re a $60 billion company, they’ll soon be graduating into the “mega cap” size bucket which means that’s when we’re supposed to be harvesting gains. We’ve almost arrived too late to invest in Snowflake, which is why we’re looking at MongoDB as a way to get additional exposure to the growth of big data.
MongoDB’s Poor Investor Relations
Lately, we’ve been encountering companies that don’t provide investors with enough information to make informed investment decisions, Altair Engineering and Cognex being two examples. Add to that list MongoDB which fails to provide the most basic quarterly/annual earnings decks along with a generic investment deck that conveys their value proposition. Overall, the company website doesn’t contain much collateral to help would-be investors understand the company aside from three decks produced this year.
The first of three 2022 presentations is a Corporate Sustainability Report in which the CEO mentions the $1 billion run rate achievement in Fiscal 2022 (wasn’t mentioned in any filings that we could see) along with a few charts describing revenue growth. Then it goes downhill fast as they talk about all the divisive employee resource groups they’re wasting shareholder resources on. That’s great 30% of your employees self-identify as women, but we could care less. Whether you sit down or stand up to take a wee doesn’t make you a better developer. Perhaps they should kick the “VP of Employee Engagement and Inclusion” and her merry band of purple-haired pronoun police to the curb and spend that money on investor relations.
The next 2022 deck is a 67-page MongoDB World 2022 Product Presentation which is said to be written for investors, but which rambles a lot making it difficult to decipher how their product evolution will capture more market share or better compete against competitors. That’s followed by a short marketing deck that says “our two biggest opportunities are correcting outdated perceptions of MongoDB among some developers and increasing overall awareness among IT decision makers.” The proposed resolution is to lead with customer success stories and then start developing content to help tell their story. That’s great, because we’re having a hard time telling a good story based on what the company provides today.
The database platform is offered in two configurations – MongoDB Atlas available on all three major cloud providers, and MongoDB Enterprise Advanced which is hosted onsite. The cloud offering constituted 56% of Fiscal 2022 revenues, a percentage that’s been steadily increasing over time. No single customer accounted for more than 10% of revenues with nearly half of Fiscal 2022 revenues coming from outside the United States, a percentage that’s been growing every year. The majority of their subscription contracts are one year in duration and we’re told that “net ARR expansion rate has consistently been over 120%” with no granularity provided. Probably the only decent SaaS metric we’re given is the “number of customers spending more than $100,000 per year” which can be seen below:
Regarding survivability, the company has about $1.8 billion in cash and short-term investments offset by $1.1 billion in convertible notes due 2026. At last year’s burn rate of around $300 million, that’s a runway of about 1.5 years. Gross margins are around 70% which means a path to profitability can easily be paved, something the company ought to talk about given today’s bear market. At the lower end of their guidance, MongoDB should see a remarkable 34% growth this year taking revenues from $874 million in Fiscal 2022 to $1,172 million in Fiscal 2023.
Our Take on MongoDB
When we analyze a SaaS firm, we don’t care what software is being sold. The bull thesis has already been established and growth potential is a given. We’re interested in looking for red flags and evaluating generic SaaS metrics that can gauge health and growth potential. Unfortunately, we’re not given enough information about MongoDB’s SaaS business model to evaluate the health of their business and monitor it over time.
Plotting the net retention rate over time as most SaaS firms do helps us see how sticky the solution is in times of economic turmoil. Gross retention rate paints an even better picture of durability. Additional revenue buckets such as “Customers spending > $1 million ARR” can help show how the solution can scale inside of large enterprises. Annual run rate is a leading indicator of where revenues are expected to eventually arrive at, so make that available in someplace other than just the CEO’s letter. We were hoping for so much more from MongoDB, but we just don’t have enough information to make an informed investment decision.
We liked the idea behind NoSQL and MongoDB being a dominant player, but now we understand why they weren’t included in the Gartner Magic Quadrant. The company talks about the need to improve their image with developers, but that same effort ought to extend to the investment community. Everyone knows this is a platform built by developers, for developers, and that catering to the needs of Wall Street isn’t their shtick, but we’re not asking for much. Including a quarterly deck with the hour-long conference call and posting these decks on the website would be an easy win. Additional SaaS metrics would also be useful in helping investors easily monitor progress as time goes on.
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