This database platform company is expected to grow by 33% next year. And that growth is the reason that Motley Fool is also now recommending the shares.
MongoDB, Inc. (MDB)
From Canaccord Genuity Research
MongoDB, Inc. (MDB) is a worthy consideration. An open-ended TAM (The Agency Manager) that is growing at least 30% combined with a strong product and excellent sales motion spells one thing: increasing economies of scale, and competitively, that means that arithmetic market share gaps become exponential.
Growth accelerated for the fourth consecutive quarter-in part driven by the inclusion of mLab, as subscription increased by 82%—and MongoDB posted its first ever FCF (free cash flow) profitable quarter. The firm noted particular strength with partners, as Mongo had its biggest quarter ever with SIs, IBM contributed a large deal in the insurance sector, and management is optimistic about the firm’s expanded relationship with GCP. Atlas continues to perform exceptionally well, as the fully managed cloud product is now up to 35% of revenue, from 14% a year ago—somewhat masking this strength in billings, management noted that two-thirds of Atlas revenue is not reflected in deferred revenue, as the product is generally billed monthly in arears.
Systems software, which is where next generation databases like MongoDB fall, is a great sector if you have innovative new technology that is reasonably priced. Mongo delivers on those fronts.
While not quantified, management noted that organic growth was consistent with the last few quarters, which is quite strong, and generating $2.3M in positive FCF marked MDB’s first profitable period as a public company; Atlas revenue increased by >340% as the firm added 900 new Atlas customers in the quarter; the number of customers with annual recurring revenue (ARR) >$100K ended at 598 (+41 in the quarter), which is up 52% y-o-y; net ARR expansion was better than 120% for the 17th consecutive quarter.
Management noted that 606-driven comps will harden in the back half of the year, particularly in FQ3, which we believe is reflected in conservative guidance; the inclusion of Realm (an open-source mobile database vendor that MBD acquired for $39M) will be modestly dilutive, which is entirely the driver of reduced operating profits in revised guidance; note that rapid growth in Atlas is a headwind to blended gross margins, which ended the quarter at 70.3%, down 340 bps from a year ago.
Like a lot of companies these days, if you believed the guidance and consensus, MDB would be too highly valued to support a BUY. However, while upsides are obviously not guaranteed, given Mongo’s technology, market position and a conservative CFO, we suggest upsides are more probable than not.
On an upside, or blue sky, scenario we can make the case that MDB could have a growth + FCF margin sum of nearly 50% in 5-years from now. That equates to roughly $2.0B in revenue (+33% growth at that time) and 16% FCF margins in C2024. Today, a G+M margin sum of 50% in the next-gen infrastructure and tools space gets you an out year EV/R (enterprise value/revenue) multiple of nearly 12x. If we haircut this by 25% and assume that MDB could fetch something like 9x forward revenue for those metrics in 4 years from now, that gets us slightly better than a $240 stock, which is a roughly 13% IRR from today. For now, these seem like reasonable assumptions, which is why we continue to believe the correct rating for MDB is BUY.
Richard Davis, CFA, David Hynes Jr., and Luke Morison, Canaccord Genuity Research, www.canaccordgenuity.com, June 6, 2019