The market started turning bearish against many unprofitable software stocks like MongoDB (MDB 1.11%) in late 2021. Moreover, the bearishness has worsened recently, with the bond market continuously flashing recession warnings. And with so many people now fearful of a recession, investors might wonder whether it is safe to invest in MongoDB.
While no business is entirely recession-proof, there are three reasons why MongoDB can hold up during a moderate slowdown.
Image source: Getty Images.
1. Digitalization drives MongoDB's growth
Digitalization is when an organization replaces human-driven processes with software-driven processes to improve productivity and efficiency while decreasing costs. Digitalization accelerated during the pandemic as business leaders rapidly deployed technology like collaboration tools, e-commerce software, machine learning, and other innovations to get around the limitations of shelter-in-place. As a result, digitalization became a must-do to survive the pandemic for many businesses.
Today, however, digitalization is more about gaining competitive advantages over rivals. Of those companies that shifted to software-driven processes, 70% grew revenues, 67% reduced costs, 43% reduced churn, and 59% improved customer experience metrics.
MongoDB benefits from digitalization because developers building new software applications favor using its database because of the flexibility, ease of use, and ability to work well in a cloud environment -- unlike older databases from companies like Oracle (ORCL 0.69%).
Consequently, MongoDB's ability to win over developers, combined with the knowledge that digitalization is a necessity for many companies to remain competitive in their industry, makes its management confident that the company can maintain growth, even in an environment where software budgets get slashed.
2. Easy-to-grow workload share
MongoDB is only a tiny fish in a large and growing database market. As of the company's first-quarter 2023 earnings report, MongoDB was still a little under $1 billion in revenues on a trailing-12-month basis.
MDB Revenue (TTM) data by YCharts.
Research and consulting firm Gartner estimated the market for database-management software at close to $80 billion at the end of 2021 -- meaning MongoDB only has a tiny market share of 1.25%.
In addition to market size, MongoDB has the dynamics of the database market working in its favor, which are different from the rest of the software market. Most software companies compete for customers, with only one competitor winning a specific customer account.
Image source: MongoDB.
However, the database market is different. Instead of competing for customers, MongoDB competes for workloads -- defined as the work done when an application requests information from a database. And in the database world, one application can request information from multiple databases from different database companies. Hence, competing for workloads is not a winner-take-all market.
Image source: MongoDB.
It is far easier to compete for workloads than for a whole customer account. The size of the opportunity and the way customers buy mean that MongoDB currently has few limitations on growing workload share in the foreseeable future -- another reason why management remains confident that MongoDB can continue to grow during a downturn.
3. A flexible and agile sales force
One strong bearish argument against MongoDB is that a recession will reduce demand for software and slow the company's revenue growth.
During MongoDB's Q1 2023 earnings call, CEO Dev Ittycheria noted that the company saw slowing growth in its self-serve and mid-market channels, primarily in Europe. Additionally, Morgan Stanley analyst Sanjit Singh recently reinforced fears of slowing growth in mid-July by claiming his channel checks found signs of a slowdown in the software sector. The pockets of weakness that he said stood out were in Europe, the small business sector, and companies exposed to start-ups and e-commerce -- all areas where a slowdown could hurt growth in MongoDB's existing portfolio of application workloads.
However, one thing in MongoDB's favor is a flexible sales force. The company can rapidly shift its sales priorities away from market segments exposed to slowing growth and toward winning workloads in market segments with more strength, thereby muting some of the impacts of a growth slowdown.
MongoDB has defied gravity so far
MongoDB sells at a price-to-sales (P/S) ratio of 20.46 -- high compared to the overall computer-processing and cloud-services industry, which clocks in with a P/S ratio of 4.34.
Still, MongoDB bulls have a case for thinking the stock is undervalued based on recent accelerating revenue growth, expanding profitability margins, a solid balance sheet, and increasing free cash flow. Additionally, 19 analysts forecast MongoDB to grow revenues and earnings faster than its industry peer group over the next three years.
If you are a growth investor looking for a company likely to hold its own and rebound quickly from a mild or moderate recession, you should consider MongoDB at current prices.
