Hedge Fund Stock MangoDB Has More Downside From Here

For last two years, MangoDB (Nasdaq: MDB) was a classic hedge fund stock – owned heavily by growth-focused momentum loving hedge funds, partly fueled by high revenue growth of the company, subscription based revenue model, macro tailwinds in the shape of rising adoption of its NoSQL databases against the incumbent MySQL and not to mention a Bull market in U.S. stocks.

Last week MangoDB came out with its quarterly results and the stock took a dive. Now if the strength of the markets over last few weeks is to be believed, one may want to venture out and buy more of the stock into the correction as it goes back to touching all-time highs, but the fundamentals suggests this may be one of the first warnings signals and there may be more downside from current levels.

Never lose track of the fundament business while looking at the stock

Even though MangoDB stock has behaved like a startup going public over last couple of years, it is apt to compare the company that released its first product in 2009 with other database providers like Oracle (Nasdaq: ORCL) and Microsoft Corp (Nasdaq: MSFT) from time to time, both of which are selling at much cheaper valuations.

 Next Yr. PEP/ Sales
MangoDB Exp. Loss 29.0
Oracle 12.6 4.5
Microsoft Corp 29.0 10.0
Valuation not helping MangoDB

Yes, a detailed coverage of database technology is beyond the scope of this blog or worthy of most investors time, it is important to note that demand for these database do get negatively impacted by the broader weakness in the economy. 

Indeed, in the most recent quarter, even though Atlas, which makes up 42% of the total revenue of the company up from 35% last year, grew over 75%, investors should expect softness going forward.  

In the most recent conference call, Michael Gordon, company’s Chief Operating Officer and Chief Financial Officer, did say the following about the product,

“we recognize Atlas revenues based on consumption, so the slowdown did impact our Q1 Atlas revenue performance. To be clear, we haven’t seen any increase in customer churn and either of our direct sales or self-service channels.”

But also added

“Also keep in mind that we will feel the impact of a full quarter’s worth of slower growth from existing Atlas customers, which impacted only a portion of the first quarter.”

So all in all the real weakness may have yet to hit the numbers and if the broader economy stays weak, don’t expect company shifting back quickly into high growth mode anytime soon.

Signs of tiredness, even though running for now

The company did raise the midpoint of its revenue guidance and tightened profitability range, now expecting non-GAAP loss from operations of $78 million to $70 million and non-GAAP net loss per share of $1.34 – $1.21. Hardly encouraging if doubts on growth takes over.

MangoDB Inc  
   
As % of RevenueLatest Qtr.Last Year
Gross Margins73%74%
Research & Development26%29%
Sales & Marketing45%51%
General and admin12%16%
All numbers exclude stock-based compensation  
Road to profitability for MangoDB will be long

As the chart above shows, even with improvement at the operating expense level, hopes for profitability anytime soon will be misplaced. Add to that growing dilution of the number of shares outstanding, which are expected to grow by more than 12% this year.

MangoDB Inc  
 Latest Q1Last Year Q1
Net Cash $54.0 $256.0
Net interest expense $11.1 $2.4
Fast shrinking cash levels

Another major concern for investors should be fast depleting cash level of the company. Yes, the company can always raise cash, but that will amount to even more dilution and on top of that low cash balance restricts the company’s ability to monetize weak market conditions to acquire strategically important technologies and companies for next leg of growth.

Is MangoDB a good short then? No, not bad enough for aggressive shorting

Almost every techy well-versed in the space will tell you that technologically, company’s products have a few advantages over the competition and every investor will tell you that high-quality, subscription-based business model that can deliver high growth rates are hard to come by. When they do, long-only, long-term oriented funds bag them, sometimes even compromising on the valuation

Revenues, growing at 46% last quarter and above the high end of guidance, continue to move on a strong growth trajectory. Subscription revenues grew at an even greater rate of 49% year-over-year. Revenue for Atlas, a major product for the company, grew at 75% year-over-year and the company ended the quarter with over 18,400 customers.

Trader hat

As the stock move from high beta growth stock loved by hedge funds, who will move to more exciting fresher growth stories, to steady hands focused on long-term growth rates, rotation might lead to various corrections and adjustments, offering multiple opportunities to enter the stock at lower levels. Staying patient will be rewarding, even if you’re itching to buy. 200 day EMA for the stock is near $150 level. So the stock may find temporary breather around those levels if the current weakness continues.

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