MongoDB (MDB) is an interesting name, one that I last covered in spring of 2018 which was about half a year after the company went public in October 2017. Quite frankly, I have been quite cautious on the name, far too cautious as shares have only seen continued gains.
During the past two years, the company has seen continued and impressive sales growth, although still accompanied by quite large losses. At the same time, share price advancements have surpassed revenue growth, making that sales multiples have increased in a challenging market. Amidst these circumstances, I reiterate a cautious stance on MongoDB, although I have been too cautious in the past.
The Business, The Thesis
MongoDB has developed a general purpose database which aims and claims to unleash the power of software for developers and applications. In traditional applications the sheer load of data, lack of adjustability of such sheets and speed is an issue with data production and analysis rapidly on the increase.
Hence, organizations require great and powerful databases with a great user interface, which furthermore can be integrated with other applications. While typical databases cannot meet the ever more stringent demands, the so-called non-relational databases (NoSQL databases) can handle the load, yet lack some flexibility. MongoDB aims to create a bridge between both issues, providing both great capacity and architectural design at once.
Founded in 2009, MongoDB has seen a rapid growth trajectory allowing it to go public late 2017 as it sold 8 million shares at $24 per share, with nearly $200 million in gross proceeds used to further grow the business. With shares opening at $30 on their opening day, operating assets were valued at $1.20 billion.
To put this number into perspective: For the year of 2016 MongoDB reported sales in excess of $100 million, marking 55% revenue growth. This implied a 12 times sales multiple for a business with solid growth, yet the company reported a very steep $86 million operating loss as well. For the first half of 2017 the company grew sales by 51% to $68 million, with operating losses flat in absolute terms at $46 million, making that losses are coming down on a relative basis. Based on the $150 million sales run rate, the company’s operating assets were valued at 8 times sales.
Given the stiff competition and reliance on single product, I was a bit skeptical on the prospects for MongoDB as it was actually valued at $1.6 billion in the latest private valuation round in 2015, making that the valuation has come down in the period 2015-2017, most likely due to the severe losses. While the growth rates and the sales multiple looked reasonable, I was not too compelled given the large losses.
During spring of 2018 shares rallied toward the $40 level, valuing operating assets at $1.7 billion, which made that the company was valued at nearly 10 times annualized sales of $180 million, as losses continued to be an issue, although the company has large cash balances of course to fund the losses. The company guided for sales of $211-$215 million in the fiscal year of 2019, with non-GAAP operating losses seen at $82-$84 million.
The company has seen stellar growth in the fiscal year 2020, with numbers reported in spring of 2019. Full-year sales of $267 million were far stronger than anticipated a year before, beating the higher end of the outlook by about $50 million. The non-GAAP operating loss of $54 million was better than anticipated as well, although GAAP operating losses came in at $98 million, largely due to heavy stock-based compensation expenses.
MongoDB guided for another year of strong growth with sales seen at a midpoint of $367 million in 2020. This would translate into 37% growth, with adjusted operating losses seen at $57 million. Including the convertible bonds outstanding, the company operated with a net cash position of $250 million. The 54 million shares outstanding had rallied from just $40 in spring of 2018 to $140 in spring of 2019, as the actual growth rate was far stronger than anticipated. This has boosted the valuation to $7.3 billion, pushing up valuation multiples to 21 times sales, as growth rates have accelerated.
What followed is a year of consolidation with shares trading in a $100-$160 range since spring of last year, and after briefly hitting the $100 mark this week, they now trade at $120. The numbers were again stronger than guided for with sales up 58% to $422 million, again more than $50 million stronger than anticipated. Fourth quarter sales rose 44% to $123 million, for sales at an annualized rate of half a billion already. While the adjusted operating loss of $54 million was in line with expectations, GAAP operating losses exploded to $148 million due to excessive stock-based compensation expenses.
Trading at $120, the 57 million outstanding shares are valued at $6.8 billion, as the company operates with a flattish net cash position with nearly a billion in convertible bonds outstanding. This values the company at around 16 times sales, making that multiples have compressed a bit over the past year, although the loss rate is still very high. Perhaps somewhat disappointing is the fiscal year 2021 outlook. Sales are seen at a midpoint of $520 million which includes an anticipated $20 million headwind from the virus. Adjusting for that headwind, revenue growth is seen at 28% in terms of sales as the company sees adjusted operating losses increase to a midpoint of $73 million in the upcoming year.
Quite frankly this company was on sale at just 8 times annualized sales at the time of the IPO, when the company grew sales at rates comfortably above the 50% mark. Fast forwarding three years since the IPO, shares have increased a factor of 4 times driven by actual underlying growth although valuations in terms of sales multiples have increased quite a bit as well, with shares now trading at 13 times forward sales, as the company is actually reporting steep operating losses, as the lack of leverage on that front is disappointing.
Furthermore, I’m not that impressed with the revenue guidance for the coming year quite frankly, making the risk reward, recognizing that the rest of the market is down a lot as well, not so compelling in my book here. On the other hand, we have to acknowledge that management tends to be conservative in its guidance, although the explicit $20 million headwind from the coronavirus might be on the low side if you ask me. Hence, a big congratulations to management and early investors in the shares, yet here I do not see compelling value emerge just yet.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.