MongoDB (NASDAQ:MDB) offers great software but remains a bad business. MDB stock isn’t ready for your hard-earned money just yet.
This is both a strength and a weakness. It’s easy and cheap to start with, but it’s often in the hands of people who don’t update and protect their code. Hackers can quickly break into such databases when they’re exposed to the Internet.
With software eating the world during the pandemic, however, MongoDB is a hot stock. It opens for trade July 21 at $223 per share, a market cap of $11.25 billion. The shares are up over 50% so far in 2020.
What could possibly be wrong?
Mongo’s managed enterprise database and Atlas, a cloud-based offering, do bring in money. This is true despite the underlying code being free to use, downloaded 35 million times in the last year alone.
Revenue grew 57% during the 2020 fiscal year ending in January, to $421 million. But losses grew even faster, to $3.14 per share from $1.90.
Despite this, investors have piled into MongoDB stock. Both its market share and its addressable market are growing. Investors were impressed by the 46% year-over-year growth of its April quarter. The problem was that losses grew 35%, from 61 cents per share to 94 cents.
Change was obviously called for. Co-founder and Chief Technology Officer Eliot Horowitz is now an advisor. His replacement is Mark Porter, who has worked at companies like Amazon (NASDAQ:AMZN) and Oracle (NASDAQ:ORCL), which make money.
The new pitch is that MongoDB offers a way out of “data sprawl,” databases generated on every device and system you can name. The latest version, MongoDB 4.4, provides a “document data model,” a contextual map, that lets all types of data be queried using the same Application Program Interface (API).
In the cloud-based version, Atlas Search is deeply integrated with the Atlas Data Lake and Atlas Realms that hold data. Once an index is created, difficult searches can be done without more coding.
Same Old Song
The problem remains, however. Great product, but where’s the profit?
Investors are now paying almost 25 times revenue for a company that has never made money. Because it’s open source, MongoDB faces enormous competition, with compatible offerings from Amazon being one example. The Cloud Czars are all up in Mongo’s market, including Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT). So are old-line database giants like IBM (NYSE:IBM) and Oracle. All these companies make money. Mongo does not.
What Mongo has is the love of its customers. Customer counts are up 30% year over year, 37% at Atlas, and the number spending over $100,000 per year is also up 30%. MongoDB has about $1 billion in cash and almost as much debt, although those are convertible notes. Managers and directors still hold 56% of the stock’s voting shares.
The Bottom Line on MDB Stock
I’m a big fan of MongoDB. I’m a big fan of open source and of companies building great products with it.
But the key benefits of open source go to the users, not the creators. It’s the products built with open source that provide value, not the underlying code. If you are buying MDB stock today, you’re betting that Atlas takes off like a rocket and that it scales to produce profit while it does so.
MongoDB’s next earnings release is due Sept. 3. Investors are still expecting growth, with $126 million of revenue, but aren’t expecting profit, an 89 cent per share loss.
I prefer to buy companies that approach profitability as they grow.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT, AMZN and IBM.