MDB specifics for Tinker

Tinker,

I may have missed a post here or there but to the best of my knowledge you haven’t posted data about Zscaler/MDB AYX although I know a few posts back you said that you ran the numbers and it looked good. I’d love to see your methodology and assumptions for ZS, MDB, AYX

Here is mine for MDB. I’ll work on others but I’m out of time for now.

MDB

assumptions:

  1. They are able to grow Atlas revenue about 4 million per quarter (this is a bit better than what they have averaged if you try to back out the big bump from mlab).
  2. DRR stays >120% on their other revenue
  3. Non-atlas revenue continues to grow modestly at around 25% (about its average)
  4. Professional Revenue stays around 5% of total revenue

note: q4 2018 was the first quarter they broke out %atlas revenue
q4 2018 Mlabs are included as part of MDB
e indicates estimates


         Atlas Revenue    Sub Revenue(no atlas)   Prof Revenue    Total Revenue    Rev % growth 
q4 2018      4.5               37.4                    3.2             45            54%
q1 2019      6.8               37.8                    3.6             48.2          53
q2           10.4              42.6                    4.6             57.5          62.7
q3           14.3              45.8                    4.9             65            59
q4           28.3              50.1                    4.9             83.2          84.7
q1 2020      31.3              52.7                    5.4             89.4          85.4                   
q2e          35.3              53.2                    5.5             94            63.5
q3e          39                57                      5.9             102.4      **58**
q4e          43                62.5                    5.9             111.7      **34.2**   
q1e 2021     46                65.9                    6.5             119.7      **33.8**

So in a year they will have 425 million in revenue and will be growing somewhere in the 30-40% range.  Will have have an EV/S of 28 ?  Maybe if they are throwing off cash like OKTA is starting to do or if atlas grows faster than what I'm modeling,  but 4 million per quarter is pretty darn good compared to what they have done historically.  Even if I bump that up to 6 million they are still only growing in the 40% range.

So how about a guestimate for future price?  
MDB's highest EV/s was 31, lowest I have is 15 back when they were growing in the 50% range.  In a year they will have ~425 million of revenue.  That would be a forward ev/s of 19.2. With no dilution or about 21 with 10% dilution.  

What kind of EV/S do we think they deserve if growth drops into the 30-40% range?  If EV/s of 25 is reasonable then in a year we could see a price of around 180 for a 14% return.

Or do we think MDB will buy some more growth?  I don't think Realm was a big money maker so that probably isn't going to do it.   Will they accelerate as they become more dominate?  Or will they grow ust a little bit faster than their segment's 30% projected growth?  I don't know the answer to any of these questions but I'm curious what assumptions you guys are using when looking at MDB.

best,
Ethan
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I screwed up the formatting for my final paragraph. Here it is in a more readable format.

So in a year they will have 425 million in revenue and will be growing somewhere in the 30-40% range. Will have have an EV/S of 28 ? Maybe if they are throwing off cash like OKTA is starting to do or if atlas grows faster than what I’m modeling, but 4 million per quarter is pretty darn good compared to what they have done historically. Even if I bump that up to 6 million they are still only growing in the 40% range.

So how about a guestimate for future price?
MDB’s highest EV/s was 31, lowest I have is 15 back when they were growing in the 50% range. In a year they will have ~425 million of revenue. That would be a forward ev/s of 19.2. With no dilution or about 21 with 10% dilution.

What kind of EV/S do we think they deserve if growth drops into the 30-40% range? If EV/s of 25 is reasonable then in a year we could see a price of around 180 for a 14% return.

Or do we think MDB will buy some more growth? I don’t think Realm was a big money maker so that probably isn’t going to do it. Will they accelerate as they become more dominate? Or will they grow ust a little bit faster than their segment’s 30% projected growth? I don’t know the answer to any of these questions but I’m curious what assumptions you guys are using when looking at MDB.

best,
Ethan

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Great post, Ethan!

I think you are far too low on Atlas, though. They said in Q4 when Atlas was up from 14m to 28m that: Our revenue performance was strong across the board and also benefits from stronger than expected Atlas consumption including a number of customers who consumed well in excess of their contractual run rates.

To me that means Atlas growth in Q4 (without the one-time bump) was really more like 7 or 8 million instead of 14 million, and so real growth in Q1 was probably 9 or 10 million. So even if you expect it won’t go much higher than 10m/quarter, I’d revise to something like this:


     Atlas Revenue    Sub Revenue(no atlas)   Prof Revenue    Total Revenue    Rev % growth 
q4 2018      4.5               37.4                    3.2             45            54%
q1 2019      6.8               37.8                    3.6             48.2          53
q2           10.4              42.6                    4.6             57.5          62.7
q3           14.3              45.8                    4.9             65            59
q4           28.3              50.1                    4.9             83.2          84.7
q1 2020      31.3              52.7                    5.4             89.4          85.4                   
q2e          41                53.2                    5.5             99.7            
q3e          51                57                      5.9            113.9
q4e          61                62.5                    5.9            129.4
q1e 2021     71                65.9                    6.5            143.4

This would give them about 486m in revenue instead of 425m. Their growth rate would be about 59%. I think this is a lot more realistic. I still don’t know about a PS ratio of 25 (that would depend on whether or not Atlas was projected to continue at these kinds of rates). But if that does remain the case, my model would mean roughly 45% appreciation in the next year. Or a little less with some dilution.

Bear

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bear, thanks for the thoughtful reply. So we only have one real quarter after the mlab acquisition which was q1 2020 and MDB only added 3 million that quarter which is why I tempered my expectations down to 4 million.

The only hint of how much atlas customers increase their spend, net expansion ratio (NER) came last quarter during their conference call.

Yeah. The net expansion rate is definitely higher than our overall blended business. We don’t publish that number, but it’s just a function of the fact that customers can consume infrastructure more quickly. They don’t have to go provision more internal capacity or deal with any of the operational issues of provisioning more capacity. And so, we find that the net expansion rates are higher than our blended rate that we’ve disclosed, which is, for the 17 quarters in a row, has been over 120%.

So maybe in the 130-140% range?

If that were the case then you might be correct. 30% addition starting in q2 would be


Dollars added from NER         
q2  3                                           
q3  4.3
q4  8.4

2021
q1  9.3

not enough data to really calculate how much is coming from new business, But if you back out a NER of 30% and some fuzzy math guessing you probably get around 2 million dollars from new business. So maybe atlas quarters would like like this.

  • NER (from last years quarter) + new business (sequential)

2020
q2 36
q3 42.6
q4 53

2021
q1 64.5

That would be about 460 million. I like that model the best so far. Again thanks for the input

15 Likes

That would be about 460 million. I like that model the best so far. Again thanks for the input

Sounds reasonable. With a little upside, depending on a number of things (like non-Atlas growth).

The question will be PS ratio. I’ve been amazed at some 50% growth companies (like AYX and SMAR) being bid up to PS ratios over 25. They’re as high as MDB’s (which has much faster growth). Obviously there are many other factors, but I suppose in the short term anything can happen.

And even though we know models only go so far, it’s fascinating to do a little analysis to predict where we could be a year from now. I’d love to see your 3 year and/or 5 year guesses. And I hope others will use this model with other companies and post their results. I know I will!

Bear

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MDB is at 17x enterprise value at $500 million. When it gets to $700 million at 12x. Unless growth dries up, by year 3 we are at single digit multiples.

We are not talking 10 years or something. W in approximately 3 years in single digit multiples.

Tinker

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And even though we know models only go so far, it’s fascinating to do a little analysis to predict where we could be a year from now. I’d love to see your 3 year and/or 5 year guesses. And I hope others will use this model with other companies and post their results. I know I will!

No need to guess, ask the spreadsheet


 **Y0       Y1       Y2       Y3       Y4       Y5**
Growth              50%      50%      50%      50%      50%
Sales    10.00    15.00    22.50    33.75    50.63    75.94
Price   500.00   500.00   500.00   500.00   500.00   500.00
P/S         50       33       22       15       10        7

If GS&M spending grows at less than 50%, cashflow and earnings should improve even faster than P/S.

The real issue is how fast these companies will saturate their markets, that’s the growth killer.

Denny Schlesinger

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