MongoDB reported earnings late last week and the stock rallied 26% in response. Mongo’s earnings call was covered in a previous post. I had been having misgivings about MongoDB relative to other opportunities which I explained in a post, specifically relative to ZS (https://discussion.fool.com/trading-mdb-for-zs-34900251.aspx).
My plan was to wait through earnings before selling MDB, to see if anything had changed, and it was fortunate that I did so (sometimes you just get lucky — makes up for so many times where I was unlucky).
Although some do not consider valuation in their investment analysis, I do consider it. One of my key views on MongoDB is that the growth of their cloud product, Atlas, was being obscured by their legacy database business, and that there was hidden value in there.
After earnings, I revisited my views on MongoDB. Specifically, I wanted to look at the value of atlas and their legacy business as a sum-of-parts analysis.
First, just a few basics on Mongo DB.
Recent price: 507
Revenue Q2: 198.7M
Gross Profit Q2: 138M
Price/Sales (current Q annualized): 40
Price/GP (current Q annualized): 58
Quarterly sequential growth: 9.4%
Quarterly Y/o/Y growth: 44%
Quarterly rev vs guidance: 10% over midpoint
Annual forecast change: midpoint raised 4% from last quarter
The company revealed the revenue contribution from Atlas in the quarter at 56% (thus Atlas was 111.3M and their legacy DB business was 87.4M). The company also revealed that Atlas grew at 86% year over year, therefore their year-before revenues were 59.8M for Atlas and 78.4M for their legacy business (their total revenue in the year ago quarter was 138.3).
So here we have a company that has a spectacular business segment Atlas, with 111M in quarterly revenue and growing it at 86% per year. And it has a legacy business segment with 87M in quarterly revenue growing at 11%.
First lets assign a value to the legacy business. The legacy business is a slow-growing on-prem software business with annualized revenue at $348M. Its a perfectly nice business, and I feel it is very likely being cannibalized to grow Atlas, yet it is still growing itself, which seems pretty good to me. I don’t really know what sales multiplier would be appropriate for that kind of business, because I don’t invest in such a company, but lets say it is probably less than 10, and probably more than 3. BAND, a company in my coverage group has a current P/S of 5 and recently grew at 6% over sequential quarters. If I give MDB the benefit of the doubt and use 7, then the legacy business is worth 2.4B. That doesn’t seem totally crazy to me for a business like that.
Then I look at Atlas. It is the star of this particular show, and it generates annualized revenue of 445M. It is growing at 86% which is massive growth relative to any standard. I feel it is somewhat goosed by cannibalization of their legacy product, but the extent is hard for me to figure, so I am going to ignore that.
If I look at relevant current revenue comps, CRWD is at approximately 46x current Q revenue (annualized). DDOG is at approximately 45. ZS is at 55, but hasn’t yet reported. At mid-guidance for next quarter (a day away) ZS, plus their normal 8% beat, they would be valued at 48. SNOW is at a whole different level at 83.
Now Atlas is growing faster than CRWD, ZS, and DDOG; but of course not SNOW. Those are some darn amazing businesses I’ve listed, all at larger scale than Atlas which is a headwind for them.
To me, 55 seems like as big a number as I’d be comfortable using in thinking about MDB Atlas relative to the other comps out there. At 55x multiplier on Atlas’s annualized current revenue, then that segment is worth $25B.
Combining the Atlas and the legacy business value, I would get a value of maybe 28B.
MongoDB’s current market cap is 32B. To get that value to work out in this sum-of-parts method, you would need to have a 67x current revenue multiple for Atlas. I analyze maybe 20-25 companies in the space on a regular basis, and no other company other than SNOW in my coverage universe has this kind of multiple (I’m sure one is out there somewhere, don’t doubt it, but it seems like an atypical multiple).
For reference (admittedly some of these are very different businesses): MELI 14, SE 20, UPST 30, DDOG 45, ZI 38, PATH 18, CRWD 46, ZS 55, ROKU 19, OKTA 32, TTD 34, DOCU 30, ZM 22, COUP 28.
Based upon this analysis, I think the market is fully valuing Atlas at present. The hidden-value thesis probably once applied previously, but today the value has been realized.
I will revisit investment in MDB periodically as they progress and their price changes. I have liquidated my entire position and put proceeds in ZS and PATH.
Thanks,
Rob