Description

Recommendation: Long MongoDB (MDB)

This write-up will be brief as I believe the idea is fairly simple. Simply put, MongoDB is one of the best businesses I have seen in quite some time. It is a low-cost, innovative database platform designed with software engineers in mind instead of database architects in mind. MongoDB’s product offering competes primarily with Oracle’s database offerings – it goes without saying that the potential market size that MongoDB is going after is massive and growing quite rapidly. The simple version of what makes MongoDB unique is it allows for much more flexibility and agility in software development – a traditional database requires you to design the schema of the database in advance and any changes to that design are very onerous to implement. As an example, imagine you have a database of customers for an e-commerce clothing business – some fields you would likely want are customer’s address, attributes that describe their preferences, gender, average order size, etc. The way a traditional database works is each unit in the database is assigned a unique key – Joe Smith is actually a random alphanumeric key id in the database, and all other data items linked to Joe Smith are also linked to that key – that is how the system functions. MongoDB is not build in such a relational manner and allows you to add different data fields relatively easily even after the fact – this is because MongoDB is what’s known as an unstructured database. MongoDB is also cheaper than Oracle for two reasons (the company claims it can be up to 70% cheaper than Oracle) – 1) they charge less given they don’t have the pricing power that Oracle does given they are a relative upstart 2) MongoDB does not necessitate using what’s known as a Database Administrator – i.e., it makes that position effectively redundant or reduces the number you need to employ in your organization. See this article for some additional detail on the difference between MongoDB and Oracle’s offerings: https://www.cbronline.com/cloud/sql-vs-nosql-from-oracle-to-mondgodb-which-database-is-right-for-your-business-4850321/.

A couple of data points that a find really striking and why I think this is a compelling investment:

Point 1:

The management team seems to be doing an excellent job – the glassdoor reviews for MongoDB are among the best I’ve ever seen for any company.

See here: https://www.glassdoor.com/Reviews/MongoDB-Reviews-E433703.htm

Point 2:

The data the company has given on the ARPU of a customer over time is really impressive and I think illustrates the value of the platform to companies. From the most recent 10-K:

“We also examine the rate at which our customers increase their spend with us, which we call net ARR expansion rate. We calculate net ARR expansion rate by dividing the ARR at the close of a given period (the “measurement period”), from customers who were also customers at the close of the same period in the prior year (the “base period”), by the ARR from all customers at the close of the base period, including those who churned or reduced their subscriptions. In the calculation of our net ARR expansion rate, we include any annualized MRR from customers who were Direct Customers in the base period, the measurement period or both such periods. Our net ARR expansion rate has been over 120% for each of the last 12 fiscal quarters.”

From the 2017 S-1:

“Additionally, as of January 31, 2017, the ARR from our top 25 customers who became customers prior to fiscal year 2017 had increased 12.3x on average as compared to the initial ARR from these customers. All of these customers had ARR in excess of $500,000 as of January 31, 2017.”
“At the end of fiscal year 2015, the 2015 Cohort accounted for $11.5 million in ARR and $24.3 million in associated costs, representing a contribution margin of ($12.8) million, or a contribution margin percentage of (111)%. At the end of fiscal year 2016, the 2015 Cohort accounted for $12.8 million in ARR and $5.2 million in associated costs, representing a contribution margin of $7.6 million, or a contribution margin percentage of 59%. At the end of fiscal year 2017, the 2015 Cohort accounted for $19.5 million in ARR and $7.8 million in associated costs, representing a contribution margin of $11.7 million, or a contribution margin percentage of 60%. These metrics are illustrated in the chart below.”

Point 3:

Discussions with friends who work in data science have indicated that software engineers and data scientists are really enamored with MongoDB’s offering – I think the main reason for this is that the flexibility and agility enable a focus on efficient results, rather than having to constantly liaise with a Database Administrator.

See this comparison for some analysis: https://medium.com/xplenty-blog/the-sql-vs-nosql-difference-mysql-vs-mongodb-32c9980e67b2

“MongoDB, on the other hand, is a good choice for businesses that have rapid growth or databases with no clear schema definitions. More specifically, if you cannot define a schema for your database, if you find yourself denormalizing data schemas, or if your schema continues to change - as is often the case with mobile apps, real-time analytics, content management systems, etc.- MongoDB can be a strong choice for you.”

Point 4:

Whale Rock Capital, a TMT-focused fund, has been very aggressively buying MongoDB shares – they initially filed a 13-D, which led me to believe they may be of the opinion that MongoDB should eventually pursue a strategic alternatives process given it would likely be an attractive target for a number of companies, especially Oracle (this interview with the PM of Whale Rock touches on his admiration for Oracle’s business: https://www.valuewalk.com/2015/10/graham-doddsville-2015-alex-sacerdote-of-whale-rock-capital/). Of late, Whale Rock has continued adding to its position, and now owns ~8% of the company based on its most recent 13-G filed 5/29/18 (they have switched from a D filer to a G filer – it is not clear why they did so).

Valuation:

On most optical metrics, this business, along many other enterprise software businesses, appears quite expensive. Given the rapid growth MongoDB is experiencing and the embedded value in its current customer base (i.e., if you assume recent customer cohorts are likely to emerge similar to earlier customer cohorts given the rapid addition of customers), the business looks attractively priced. I think MongoDB’s ARR expansion numbers are superb as compared to many other SaaS businesses. Additionally, I think MongoDB is really a marquee asset given I believe it will likely control a substantial portion of the database market in the future and the database is only growing in importance in the tech stack. Put another way, I think it is much more attractive to own a key player in the database market than a single-purpose SaaS business that is very good but only in a very specific niche – i.e., dental practice management SaaS software or something along those lines.
Making some rough estimates on current embedded revenues, I believe MDB is trading at ~8.4x embedded subscription revenues and ~18x embedded EBITDA which I think is very attractive for a business with MongoDB’s growth potential and that is likely going to be a core part of the tech stack for years to come.

In terms of a target price, I don’t have any specific target price, other than I expect this business to compound at a high rate over time given I expect all of the KPI’s to continue to grow rapidly over the next few years, and I expect the stock to follow suit. Additionally, I think there is a strong possibility MongoDB will be acquired over the next few years given it is a highly strategic asset.

Risks:
1) Enterprise software falls out of favor – it goes without saying that enterprise software is currently in vogue – if this changes materially, MongoDB would likely correct as well, but I would expect this to be temporary as long as the company continues executing well
2) Quarterly earnings fail to meet expectations – one thing I have noticed watching some of the enterprise software companies over the years is given so much of the value is in the out years, small earnings hiccups receive huge market (over)reactions – as has become apparent for many companies like WDAY, NOW, etc. these have been buying opportunities for the most part.

Appendix:
Recent Needham Conference Deck: https://investors.mongodb.com/static-files/b08b46b9-e74b-42b7-aafe-4c6501ab67d1

Catalyst

1) Continued operating performance – company is reporting earnings 6/6/18
2) Eventually, I think MongoDB is likely to be acquired – potential suitors are Oracle, Salesforce (already own a very tiny stake), tech-focused private equity firms like Silver Lake or Vista Equity, among many others
3) The company only went public in October 2017, so I expect more people will discover the company over time and it will start showing up in more 13-F’s as that happens