Choosing a database to power your most important applications is a strategic decision with long-term consequences. Given the gravity of this choice, why would any business go with a 50 year-old technology that was born before the internet, cloud computing, or high-speed networks?
MongoDB (NASDAQ:MDB) was founded in 2007 to build a database product specifically suited for the cloud era and modern application technology. Turns out the founders were on to something. Its products have been winning customers all over the world and its shareholders have benefited from market-trouncing returns.
Investors would be smart to buy this designed-for-the-cloud database specialist. But before you log into your brokerage account, let's look into why this product is better, how it's using critical influencers to grow, and how this massive market will transition to new technology.
Why MongoDB is better
Legacy databases are designed based on a column and row structure like a spreadsheet. But as data has gotten more plentiful and complex, this architecture has started to show its age. Today, databases are expected to be always on, allow for cloud-based access globally, and let a multitude of users hit the underlying real-time data concurrently without degrading performance. In the video below, company co-founder Eliot Horowitz explains in layman's terms how its product is different from (and better than) its legacy competitors. For tech investors, this clip is well worth the five-minute investment.
Let's look at an example application to illustrate the expectations for modern databases. The popular online game Fortnite by Epic Games runs on the MongoDB platform. For those not familiar with this game and its cult following, it begins with 100 players parachuting onto an island battlefield. Competitors start without possessions and have to search for weapons, gear, and building supplies to gain an advantage and defeat the other participants as the play area shrinks. The last player to remain alive through this 3D high-definition bloodbath is declared the winner. Gamers log in from all over the world to participate in this cloud-based massive multiplayer experience powered by the lightning-quick performance of MongoDB's product.
Now that you have an understanding of the product, let's look at the business and its key customers.
Developers are driving growth
The product was built "by developers, for developers." More and more, application developers are becoming key influencers for the purchasing decisions of today's information technology organization. As a result, the developer-centric mindset permeates MongoDB's marketing and sales efforts. It's built an extensive developer hub that serves as a central location for all "developer content, programs, and resources," including its robust MongoDB University.
This focus on the developer community has proven wildly successful. Since 2017, revenue has nearly tripled. Last year, MongoDB eclipsed 17,000 customers, passed 90 million cumulative downloads of its trial software, and reached $422 million in annual revenue. Revenue is primarily attributable to subscriptions for its two main products: MongoDB Enterprise Advanced (EA) and its cloud-hosted Atlas product. Its EA product (47% of annual revenue) is for larger companies that want to have more control of how the database is managed or maintained, or where it's installed. Its Atlas product (39% of annual revenue) is growing at a faster rate, as it's a cloud-hosted, all-in product that makes it easy for developers to ramp up a new database.
For the coming fiscal year, management is projecting revenue in the range of $510 million to $530 million, or 21% to 26% annual growth, a tempered outlook based on sales cycles being extended due to COVID-19. The company isn't profitable, but that's because it's investing heavily to drive growth.
The database market is massive
IDC projects the database market to be $71 billion in 2020, growing to $97 billion in 2023. We have less than 1% share of the global database market and a long runway for growth ahead of us.
-- President and CEO Dev Ittycheria (Q4 2020 earnings call)
Deciding to upgrade or replace a database is a high-level strategic decision and doesn't happen overnight. Chief Operating Officer and Chief Financial Officer Michael Gordon explained how he looks at the database market opportunity in a recent interview. He indicated that the growth in IDC's estimated annual spending from 2020 to 2023 ($26 billion) is coming mostly from new applications. This new business provides MongoDB with an opportunity where it has significant advantages to win.
The $71 billion in "base" annual spending is related to ongoing costs for existing (likely legacy) databases that have a replacement cycle of eight to 10 years or more. As these come up for replacement decisions, it gives the company a chance to compete for those opportunities. Between new applications and replatforming opportunities, MongoDB has a long road of growth ahead.
The smart investor's bottom line
As with other growth companies, this database specialist's stock is richly priced at a price-to-sales ratio of 30. But this 13 year-old company has a tremendous growth history, a huge developer fan base, and a massive market to tap for years to come, which makes it worth the premium. You'd be smart to buy a few shares now to add to your diversified portfolio and hold for the next decade (or more).