Why I exited Mongo

I sold out of Mongo in the pre-market right after earnings were announced. I’ll let my paraphrased comments from WSM (Wilhelm) and Finally Foolin tell the story.

Here’s Wilhelm’s take: I sold MDB but unfortunately only after the stock had dropped like a rock after earnings, and deservedly so imo. Because it was a very large position, it hurt my portfolio a lot. Even though revenue came in ok at 53% yoy,

The guide was for revenue to remain flat in the next quarter, and any semblance of operating leverage disappeared.

Customer growth stalled.

Gross margin dropped by 1.6% sequentially,

Operating margin deteriorated by 7.4% sequentially and

FCF deteriorated by 18.9% sequentially, to -16% for the quarter, the worst FCF margin in 4 years. I really didn’t need to look much further than that to sell.

And Finally Foolin’s take: I was very disappointed. The larger slowdown in Atlas especially . I thought their workloads were much more mission critical but now I’m wondering if a large percent of applications running on them are more ancillary rather than mission-critical. To the point where their usage was effected.

The only other rationalization I can come up with is that the Serverless that became generally available had a bigger negative effect than they expected. This allows companies to only pay for what they used (similar to Snowflake).

The call was a lot of talk about Macro, Macro, Macro, & tough comps. None of my other companies talked about macro like they did.

I have closed out my MDB position and moved most of that money to Sentinel One. Will probably lower my Sentinel position but it’s now my #2 spot.

Saul: I couldn’t have said it better myself

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I’ll add a bit to my piece here. I’ve been thinking more about Mongo and was saving this for my monthly writeup, but since you brought up this thread, its the perfect place for it.

There are lots of reasons I sold out of MDB. Indeed, before the call and after release of the earnings, I was still going to hold on to my shares. Yes, I saw how much Atlas slowed and that is a big concern, but it wasn’t until listening to the call and hearing macro macro macro combined with their reasons for Atlas and overall slowdowns and what they need to do in the future to be successful that I realized my thesis is wrong and sold out. Now, it could still be very successful but not in the way I thought it would. Let me explain.

Well, first, databases and applications ARE mission critical. If the Atlas usage slowed so much, why?

MDB mentioned something on the call about having their sales staff call current customers trying to get them to use their current applications more… This seems a bit odd to me.
“Hi, this is FF, your MongoDB sales rep, we noticed you aren’t using your applications running on MDB as much as you were last quarter. Can you please start using those again?”
Is it possible the applications running on MDB in general aren’t as mission critical as applications running on other database platforms. It does make sense as SQL database platforms are much more mature, especially around security and other pieces.

The other alarming thing I heard on the call was discussion on what it will take for MongoDB to be successful in the future. The requirement of new workload types and such and selling/convincing customers of these. So… while innovations are very important for every company, CRWD, SNOW, ZSetc… all have futures that can be very bright with the current products. Sure, they’re continuing to innovate to make it brighter but SNOW’s success in the future isn’t dependent on say, UNISTORE becoming a success. This puts the MDB future more in a bit more speculative bucket than I previously was thinking.

However, if a company is dependent on more and new workloads being on their platform, then they better be coming out with massive innovations so valuable that other platforms do not have those. Cloudflare’s R2, D1 (hopefully R2D2 soon) is a prime example. Snowflake’s secure edges are another. These are both things that others simply don’t have or can’t offer, or are trying to follow with.

What are the innovations for MongoDB?
Glad you asked. They’ve been touting two.

  1. Encryption while querying data (EXPRESSIVE QUERIES)
  2. Tool to migrate data from a SQL/table structure to a MDB storage format

These are not cutting edge changes. The first one is something that SQL databases have had for many years. Indeed, Mongo is in the chase position in security. SQL Server has had this feature for so long now that the first version with it is considered LEGACY!! Its in EXTENDED SUPPORT (meaning no more patches unless a company pays for it because that product is so old).
Mongo’s press release for this was technically accurate though but unless you really understand databases, you won’t pick up on the tricky piece. Most transactional databases are SQL databases. Queries are writen in the SQL language. MongoDB is NOT a SQL database. So yes, the presser is accurate but in my opnion it was misleading. Mongo is the first database to offer queryable encryption with EXPRESSIVE QUERIES. NOT the first to offer queryable encryption.

The second one innovation, a tool to migrate data to MongoDB from SQL/table data. Great! Again, its definitely needed. HOWEVER, moving the data is not the hurdle to migrating from a SQL database to a NoSQL (MongoDB) database. The biggest hurdle is the CODE to access the data. A company will need to change ALL the code of a system that interact with the database.

So back to my point, these are not world changing features, ESPECIALLY if the MDB future is dependent upon innovation.

There were more but these to me were the biggest issues. I could be off on some of them but… the questions raised here are so big that I’m not willing to hold on to see if I’m understanding this correctly. Therefore, sold and re-allocated to other companies with much clearer futures.

I hope I’m wrong here and my friends who are still in Mongo will be wealthier than I due to holding on to Mongo.

FinallyFoolin
https://twitter.com/FinallyFoolin

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I also sold out of MDB after earnings. Unfortunately, I had finally decided to take a position in the weeks prior to earnings so I quickly managed to lose 25% on my new investment. But, I think selling was still the right decision. Ultimately, companies need to generate cash for investors. Yes, there’s a period early in a company’s history where capital is required to get things going (build the business and grow the sales). I’ve previously posted on what to look for in a company’s path toward profitability:

https://gauchorico.com/growth-stock-analysis-part-6/

SaaS companies like CRWD and DDOG have transitioned from companies that required investment capital in order to build the business and grow to companies that now generate enough cash to sustain their continued growth. DDOG was founded in 2010 and CRWD was founded in 2011, and both have been generating FCF for about three years so DDOG nine years into its existence and CRWD eight years into its existence. Both of them made steady progress (shown by improving operating leverage) along the way. Thus, their business models have been proven. SNOW is another example that is rapidly expanding operating margins. MDB was founded in 2007 so 15 years ago and there are no operating profits even on the horizon.

So why did I decide to invest in MDB prior to earnings when I had initially pointed out that MDB wasn’t showing significant progress toward improving operating margins? Well, someone pointed out that they had been making very slight progress. I looked again carefully and saw that there was a trend of small improvements. OK, so I gave them the benefit of the doubt that these slight improvements where more than just noise. Also, Atlas revenue (more important than non-Atlas revenue) was become a larger and larger share of the business and growing at 70-80%+. In addition, MDB is disruptive to legacy databases in a world where data is becoming increasingly important. So I took a small position in MDB.

Last quarter’s results showed that operating expenses (as a percentage of revenue) had spiked back up and FCF was highly negative. My conclusion was that MDB remains unproven in its ability to convert its high growth into excess cash for investors. Fifteen years in; I mean come on already! In addition, MDB maintaining its top line growth was also in question. MDB might turn out to become like TWLO, a company that places growth above all while the success of its business model (i.e. the ability to generate cashflows) remains in question. There are companies that can’t prioritize profitability (flawed business models) and there are companies that won’t prioritize profitability (management that isn’t disciplined). The very best companies can maintain a high level of top line growth while ALSO showing improving operating profits. Again, companies such as these include DDOG, CRWD, and SNOW. TWLO, so far has failed in this regard. NET has yet to prove that it can and will end up with increasingly large FCF numbers. S also needs to prove that it will be able to generate better and better operating margins and return FCF to investors before its growth slows down.

GauchoRico

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