Last year was more than impressive for equity investors. Tech stocks drove the S&P 500 higher by 30% in 2019, and the bull run has now extended to 2020. But even as markets trade marginally below record highs, there are still some tech stocks that have experienced a pullback in recent times. Cloud companies MongoDB (MDB 7.76%) and Twilio (TWLO 2.94%) are trading below their 52-week highs, but they might gain significant momentum if the market sustains its bull run in 2020. Here's why you might want to consider an investment in these two growth stocks.
MongoDB is up almost 600% since its IPO
Shares of MongoDB went public back in October 2017 at $24. The stock has gained close to 600% in less than three years, easily crushing the broader market's returns. But what has driven this incredible growth?
MongoDB is a general-purpose database platform. The company's platform is designed to run applications in the cloud, on-premise, and in a hybrid environment. Its primary subscription package is MongoDB Enterprise Advanced, which includes the company's proprietary database server, security, and enterprise management capabilities, and graphical user interface and analytics integrations.
It is a leader in the document database segment, which stores a broader variety of data types in information-filled documents, compared to traditional databases' more rigid and limiting row-and-column format.
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MongoDB believes it is in the early stage of a "once-in-a-generation shift in database technology." The company has estimated the total addressable market for database software at $64 billion.
Furthermore, the database market is estimated to touch $40.4 billion in annual sales by the end of 2022. Oracle, a market leader in database management, has increased revenue in the mid-teens range over the last two years, but MongoDB has been growing at a far faster pace. In the fiscal third quarter of 2020 (ended in October), MongoDB increased sales by a stellar 52% year over year to $109.4 million.
The company grew subscription sales by 56%, while sales for its Atlas product were up 185%. Atlas is a cloud-hosted database-as-a-service (DBaaS) offering that now accounts for 40% of total sales, with an annual revenue run rate of $175 million in less than three years since its launch.
MongoDB is able to leverage its cloud services to gain insights into how customers are using its offerings. By knowing which products and services to focus on, or which new markets to pursue, the company has an easier time gaining traction and market share, while also ensuring it can more readily retain its current customers.
MongoDB's overall 52% revenue growth was aided by a 92% increase in the company's customer base, from 8,300 a year ago to 15,900 now.
As businesses move toward the cloud, MongoDB is also expanding its product offerings and capabilities. MongoDB has partnered with China's Alibaba to gain a foothold in the country. This partnership with a billion-dollar domestic colossus in a high-growth market should continue to drive MongoDB's top line in the coming years.
Despite the company's strong performance in the third quarter, the stock declined by 11.5% in December 2019, possibly because of concerns over high valuation.
Twilio has gained 700% since IPO
Shares of Twilio went public in June 2016 at a price of $15. The stock has gained about 700% in three and a half years and has been a winner among high-growth companies. Twilio offers a cloud communication platform enabling developers to build and scale real-time communications within software applications.
In the fourth quarter, Twilio increased revenue by 62%. Twilio ended Q4 with a customer base of 179,000, up from 140,000 in the prior-year period. The company continues to invest in developing new products to take advantage of a fast-growing market.
In 2018, Twilio launched a contact center management software, as well as a developer kit targeting the high-growth Internet of Things segment. According to the company's website: "Millions of developers around the world have used Twilio to unlock the magic of communications to improve any human experience. Twilio has democratized communications channels like voice, text, chat, video, and email by virtualizing the world's communications infrastructure through APIs that are simple enough for any developer to use, yet robust enough to power the world's most demanding applications."
Twilio's dollar-based net retention rate stands at a healthy 132%, which indicates that existing customers are now spending more on the Twilio platform. The company remains optimistic about its fastest-growing segment, the programmable communications cloud vertical.
Twilio's acquisition of SendGrid will expand offerings in its primary business segment, communications. The SendGrid acquisition was closed in 2019. It is a leading email API provider and processed close to 1.5 trillion emails at the time of the acquisition.
Twilio has estimated the total addressable market at $66 billion, and with annual company sales totaling $1.13 billion in 2019, it could also be all set to experience stellar growth over the next few years.
The verdict
MongoDB and Twilio are part of high-growth segments, trading at nosebleed valuations. MongoDB has a market cap-to-sales ratio of 24, while that multiple for Twilio stands at 15. While MongoDB is still posting a non-GAAP (adjusted) loss, Twilio stock has a forward price-to-earnings multiple of 679.
These high valuation metrics will mean that the two companies will underperform the markets in a sell-off. But any decline in share price would likely provide investors an opportunity to buy these stocks at better valuations.
The two stocks should be on the radar of any long-term investors interested in their addressable market, stellar growth metrics, and rising profitability.
