The 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. We know that markets are trading marginally below record highs.
However, there are still some tech stocks that have experienced a pullback in recent times. Cloud companies such as MongoDB (MDB 1.11%) and Twilio (TWLO 1.13%) are trading below their 52-week highs and might gain significant momentum especially if the bull run sustains in 2020. Here's why you can look to invest in the two growth stocks.
MongoDB is up 500% since IPO
Shares of MongoDB went public back in October 2017 at a price of $24. The stock has gained over 500% in less than three years, easily crushing broader market returns. But what has driven this incredible rally?
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. Document databases store data in information-filled documents, compared to traditional databases that store data in the row-and-column format.
image source: Getty Images.
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.
In the fiscal third quarter of 2020 (ended in October), MongoDB increased sales by a stellar 52% year over year to $109.4 million. It grew subscription sales by 56% while Atlas sales were up 185%.
Atlas is a cloud-hosted database-as-a-service (DBaaS) offering and now accounts for 40% of total sales with an annual revenue run rate of $175 million in the less than three years since its launch. Revenue growth was also driven by an increase in the company's customer base which now stands at 15,900.
As businesses are moving 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 will continue to drive the company'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 due to 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 close to 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 third quarter, Twilio increased revenue by 75%. 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 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."
The dollar-based net retention rate stands at a healthy 132% which indicates that customers are now spending more on the Twilio platform. The company remains optimistic about its fastest-growing segment, which is the programmable communications cloud vertical.
Twilio's acquisition of SendGrid will expand offerings in its core business segment, which is a core communications platform. 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 $1.12 billion in 2019, it is all set to experience stellar growth over the years.
The verdict
MongoDB and Twilio are part of high-growth segments. They are trading at expensive valuations. MongoDB has a market cap-to-sales ratio of 20.6 while this multiple for Twilio stands at 15. While MongoDB is still posting a non-GAAP loss, Twilio stock has a forward price-to-earnings multiple of 496.
These high valuation metrics will mean that the two companies will underperform the markets in a sell-off. But a decline in share prices provides an opportunity for investors to buy the stock at a better valuation.
The two stocks should be on the radar of long-term investors looking at their addressable market, stellar growth metrics and rising profitability.
