MongoDB (MDB) reported Q3 2020 earnings results after the market closed on December 9th. Overall, the results were strong and exceeded expectations. This drove an initial spike in share price, which has receded through the day. This performance provides a great example of why investors need to maintain a long term perspective with software stack companies. Let’s dive into the results.

Headline financial results (EPS is Non-GAAP):

  • Q3 EPS of ($0.26) vs. ($0.28) expected. Beat of $0.02.
  • Q3 Revenue of $109.4M vs. $97.5M, up 52.4% year/year. Beat of $11.9M or 12.2%.
  • Q4 projected EPS of ($0.28) vs. ($0.30). Raise of $0.02.
  • Q4 projected Revenue of $110M vs. $105.6M expected. Raise of $4.4M or 4.2%.
  • FY 2020 projected EPS of ($1.03) vs. ($1.07). Raise of $0.04.
  • FY 2020 projected Revenue of $408.2M vs. $394.2M expected. Raise of $14M.

Other highlights:

  • Subscription revenue growth of 56%
  • Over 15,900 customers on October 31, 2019. This is up 900 from the prior quarter and 7,600 over the prior year.
  • MongoDB Atlas revenue represented 40% of total Q3 revenue, up over 185% year-over-year
  • Net revenue expansion rate remained above 120% for the 20th consecutive quarter
  • Ended the quarter with 688 customers with at least $100,000 in ARR and annualized MRR, which is up from 490 in the year ago period
  • Added auto-scaling, a major new feature for MongoDB Atlas. This brings fully automated capacity management to customers’ MongoDB databases. Atlas will automatically adjust instance sizes up or down as needed by using predictive modeling and proven practices developed from managing tens of thousands of MongoDB deployments.
  • Announced a new partnership with Alibaba Cloud, the data intelligence backbone of Alibaba Group (BABA). MongoDB enjoys enormous global popularity with developers and China has been one of the countries with the most MongoDB downloads for the past several years. Now, users in China have access to an authorized MongoDB-as-a-Service.

After the market opened the next day on Dec 10th, MDB stock initially spiked as high as $144.80, representing a gain of 10.5%. However, as the day progressed, the price slumped towards break-even and eventually closed down 1.40%. That represents quite a swing and is partially explained by negative market sentiment towards high-multiple software stocks that has persisted through 2H2019.

However, I believe there is another concern over valuation, and reconciling that with a deceleration in revenue growth going into Q4. Even with the raise, the revenue projection of $110M for Q4 represents about 28.6% growth over Q4 2019 revenue of $85.5M. Without the raise in revenue estimates, this growth would have been 23.5%. Obviously, coming out of Q3 with revenue growth of 52.4%, this reduction in growth is significant.

MongoDB leadership had warned about this situation on the Q2 earnings conference call and reminded investors about it again during the Q3 call. They provided several explanations. First, their mLab acquisition is purposely losing customers as it is folded into the core MongoDB offering, and the (lost) revenue is having a negative impact on a year/year view. This isn’t reflective of demand for the core MongoDB product. Second, there was a significant one-time usage overage in Q4 2019 by several customers, which management is not counting on again (although arguably Q4 traffic surges might repeat).

The million dollar question, of course, is whether 28% year/year growth becomes the norm in FY 2021 (next year), or a rate closer to this past quarter of 52% is maintained. At a Price/Sales ratio of around 21 on trailing sales, a growth rate closer to 40 – 50% would be necessary. At best, a non-profitable company with a 28% growth rate merits a P/S ration of 10 – 12, implying a price reduction of 50%.

How can we reconcile this? First, given the outperformance of Q3 revenue of about 12%, we could assume that actual Q4 revenue will benefit from a similar outperformance and land closer to 40%. Also, Q1 2020 revenue was $89.4M, representing a quarterly gain of 4.5% over Q4 2019. This will likely provide an easier comp for the Q1 2021 projection.

Here is a possible scenario – Q4 2020 revenue guidance was just raised 4.2% to $110M. The Q3 revenue beat was by 12.2%. Let’s say the Q4 revenue beat is 10%. That would put Q4 revenue at $121M. If the quarter/quarter growth from Q4 to Q1 was 4.5%, that puts Q1 2021 revenue at about $126.4M. This represents year over year growth of 41.4%. This would put revenue growth closer to our 40 – 50% target.

I think the key consideration is still what will happen over the next 3-5 years. This goes back to the thesis for my original purchase recommendation for MongoDB. As Dev Ittycheria stated on the Q3 conference call, “We are in the early stages of a once-in-a-generation shift in database technology and we remain confident in our ability to capture a meaningful share of the $64 billion global database software market.”

Some thoughts after the quarter:

  • MongoDB is still a leading database solution, with strong developer evangelism.
  • They continue to add meaningful new features, which further extend addressable use cases (like search and data lake).
  • They are continuing to solidify and grow relationships with cloud hosting providers, including the introduction of a solution in China through Alibaba Cloud.
  • Interestingly, at last week’s AWS re:Invent, there were no new announcements related to the AWS DocumentDB solution. This was remarked by one of the analysts on the call, with the inference being that AWS has ceded this space to MongoDB.
  • The CEO highlighted several large customer wins in the quarter, including The Washington Post, Keller Williams Realty and Foursquare. These all represented significant new applications being built on or migrated to MongoDB.

The Q3 results and subsequent commentary did not change my base thesis for a MongoDB investment. I was happy to see a significant beat and raise across primary financial metrics. This demonstrates to me continued strong execution and sales motion. I still expect to see MongoDB exhibit strong revenue growth (annualized average rate of 40%) over the next 5 years. My price target for the end of 2024 remains at $490 or greater.