Day: July 5, 2024

Introduction & Funding Thesis

MongoDB (NASDAQ:MDB) is a document-based database supplier that permits growth groups in organizations to raised handle information and construct functions successfully. The corporate has severely underperformed the S&P 500 and Nasdaq 100 YTD. I initiated a “maintain” ranking on the inventory earlier than its Q1 FY25 earnings, the place my thesis was predicated on my perception that the inventory was overvalued given its future development projections and that the administration must beat and lift steerage by at the very least 25% with a view to justify its valuation. Since then, the inventory has misplaced greater than 24% of its worth, because the administration did not shock.

Whereas the corporate beat each income and earnings expectations for Q1 FY25, the administration has diminished its income and earnings forecast for FY25 as consumption traits for Atlas are rising slower than anticipated together with a weaker pipeline for its multi-year Enterprise Superior (“EA”) license offers. Though the administration is optimistic long-term because it continues to spend money on its strategic account program and develop gross sales capability, whereas it drives a strong genAI product roadmap, it has created elevated margin stress. Assessing each the “good” and the “dangerous,” I consider that the inventory doesn’t current a sexy entry level at its present ranges, regardless of the sell-off. Consequently, I will likely be staying on the sidelines and ranking the inventory a “maintain” at its present ranges.

MongoDB beat Q1 income steerage, however weak spot in Atlas consumption development is regarding

MongoDB reported its Q1 FY25 earnings, the place income grew 22% YoY to $450.6M, with Atlas income representing 70% of Whole Income and rising 32% YoY. When it comes to buyer depend, the corporate grew its buyer base by 1400 sequentially, bringing the overall depend to 49,200, with 47,700 of them being Atlas prospects. As the corporate invests in its strategic account program, which incorporates touchdown and increasing massive enterprise accounts, it ought to see a rising variety of prospects with $100Okay in Annual Recurring Income (“ARR”). In Q1, prospects with $100Okay in ARR grew 21% YoY and 4% sequentially to a depend of 2137.

Though the corporate beat its income steerage for Q1 after it beforehand outlined that it will not be getting a income bump from unused Atlas commitments as they’ve modified their gross sales incentive construction to scale back the significance of upfront commitments, the administration mentioned that consumption development was under expectations throughout prospects, whereas the addition of latest workloads was additionally slower than anticipated. As well as, the corporate can also be seeing a smaller contribution from not too long ago acquired workloads.

Whereas the administration attributed the weak spot to macroeconomic elements and expects to proceed successful new workloads throughout present and new prospects for the rest of the yr because it has realigned its gross sales construction and incentives to concentrate on successful workloads with excessive development potential with its strategic account program, a giant space of fear is that the administration has diminished its full-year income steerage from $1.91B to $1.89B.

Specializing in enterprise accounts and GenAI-led product innovation to spearhead development

Whereas I’ve already talked in regards to the firm’s focus in its strategic account program to focus on enterprise prospects the place it has greater development potential to accumulate new workloads and drive deeper adoption throughout a number of developer groups, the second space that the administration is optimistic about is their genAI-powered app modernization program, the place an growing variety of prospects are opting in, on condition that MongoDB has already run its first two pilots the place they demonstrated that they’ll meaningfully scale back the time, value, and danger of modernizing legacy relational functions.

The third strategic space that MongoDB is positioning for is to grow to be a key part in prospects’ AI tech stack, the place they’re leveraging their companions to construct an ecosystem to make it simpler to construct AI-powered functions with the launch of the MongoDB AI Utility Program (“MAAP”). This program brings collectively hyperscalers, basis mannequin suppliers, genAI frameworks, and extra to allow their prospects to speed up their genAI roadmap with pre-built integrations, reference structure, {and professional} companies.

On the similar time, the corporate additionally launched MongoDB 8.0, which is able to allow their prospects to construct excessive efficiency, scalable, and safe functions, together with rolling out the overall availability of Atlas Stream Processing to allow builders to construct real-time and distributed functions, thus bettering operational efficiencies and boosting developer productiveness.

Revenue Margins will shrink additional than initially anticipated from weaker unit economics

Shifting gears to profitability, the corporate generated $32.7M in non-GAAP working margin, which got here above expectation. Nonetheless, non-GAAP working margin declined 500 foundation factors from the earlier yr to 7%, however the administration had already communicated that it might see a decline in profitability as they would not see a FY24-style income bump from unused Atlas commitments and multi-year license income from the EA providing, together with growing its tempo of gross sales hiring. What’s regarding is that the administration diminished its profitability steerage for FY25 by nearly 10% to $175M, down from $193M, representing a margin of 9%, as weaker year-over-year Atlas consumption and slower pipeline for multi-year EA offers will squeeze on working leverage, thus shrinking margins.

Revisiting my valuation: There is no such thing as a funding alternative but

In my earlier submit, I had outlined that MongoDB would want to beat and lift steerage by at the very least 25% with a view to justify its valuation. Since then, it has reported its Q1 earnings, and sadly, that has not been the case, with the administration revising its income and earnings projections downwards as weak spot in Atlas consumption is predicted to persist together with a weaker pipeline for multi-year EA offers. Whereas the administration attributes the current weak spot to macroeconomic elements, and it continues to spend money on its product roadmap whereas increasing its gross sales capability to drive new workloads to achieve market share sooner or later with enterprises anticipated to scale their spending on constructing and deploying genAI functions, the investor response has not been constructive.

Assuming that MongoDB returns to rising in its low twenties vary after FY25, after rising at 12.5% YoY as per administration’s steerage, because it sees bettering workload acquisition traits from bettering macroeconomic circumstances, product innovation, and the genAI funding cycle, it ought to generate $2.7B in FY27. When it comes to profitability, the administration had outlined its long-term profitability goal of 20% in its Investor Presentation, however since we’re uncertain of the precise timeline, I’ll assume that it’ll enhance its non-GAAP working margin from a projected 9% in FY25 to 15% in FY27 as unit economics enhance. It will translate to a non-GAAP working earnings of $408M in FY27, which is equal to a gift worth of $337M when discounted at 10%.

Taking the S&P 500 as a proxy, the place its firms develop their earnings on common by 8% over a 10-year interval with a price-to-earnings ratio of 15-18, I consider that MongoDB ought to commerce at 3 times the a number of, given the expansion charge of its earnings throughout this time period. It will translate a PE ratio of 50, or a worth goal of $231, which represents a draw back of 12% from its present ranges.

My remaining verdict and conclusions

Whereas I’m optimistic long-term on MongoDB’s strategic concentrate on successful and increasing enterprise accounts, whereas driving product innovation to place itself as a key part within the genAI tech stack for its shoppers ought to assist it purchase workloads because it positive factors market share within the coming years, I consider that short-term investor pessimism is rightfully positioned. In my earlier submit, I had written that to ensure that MongoDB to take care of its present valuation, the administration would want to beat and lift steerage by at the very least 25%. Sadly, that has not been the case. Quite the opposite, the administration has diminished its income and earnings projection for FY25, and in consequence, the inventory has declined 24% since my writing. I consider that till the corporate sees an enchancment in its Atlas consumption development by way of a mixture of latest workload acquisition and utilization of present workloads, buyers will likely be cautious and sentiment will likely be dampened. Concurrently, the inventory additionally would not present a sexy entry level when taking future development prospects under consideration. Assessing each the “good” and the “dangerous,” I consider it’s best to remain on the sidelines in the intervening time whereas ranking the inventory a “maintain” at its present ranges.