MongoDB carries a bit of nostalgia for our team as it was one of the first stocks we covered after launching the premium site in July of 2019. At the time, there were concerns DocumentDB would rival Atlas yet Amazon had declared Atlas the segment winner at the open-source conference OSCON that month.
The company reported revenue of $285 million compared to estimates of $267 million for a $18 million beat. This represents growth of 57% and is the highest growth rate since Q3 2019. Particularly, it proves MongoDB can accelerate post-Covid which is rare among its peers.
The company had a sizable beat on adjusted EPS of $0.20 compared to estimates of ($0.10) EPS, which was a ($0.30) beat. The company’s adjusted operating income was $17.5 million compared to a loss of $2.8 million in the year ago quarter.
On a GAAP basis, the company reported EPS of ($1.14). Notably, GAAP losses increased this quarter to ($75.9) million compared to a GAAP loss of ($61.4) million in the year ago quarter. This is due to stock-based compensation expenses of $91 million with shares increasing from 61 million to 67 million over the past 12 months.
Gross margin expanded from 72% in the year ago period to 75% for gross profit of $214.3 million. The company stated this was due to increased efficiencies in Atlas. The company has $1.8 billion in cash and cash equivalents of which $456 million is cash. The company’s cash flow this quarter was $8.4 million, which is down from $16.8 million sequentially. Operating cash flow was $11.6 million compared to $22.3 million last quarter which management explained is partly because Q4 has more days than Q1 for consumption.
MongoDB is estimating a $30 to $35 million headwind. With that said, MongoDB reiterated guidance for the full year at $1.18 billion which would imply the company had expected to beat by $30 to $35 million. Management is also forecasting a $4 to $5 million headwind for next quarter yet was still able to raise guidance from $277 million expected next quarter to $279 million-$282 million provided as new guidance. The headwind of 1% sequential growth this quarter came from slower-than-expected customer growth in self-serve and mid-market channels in Europe yet could spread to impact all geographies.
The earnings guide for next quarter is for adjusted EPS of ($0.31) to ($0.28).
As we had covered three years ago, the MongoDB story centers around Atlas. This was the fourth quarter of over 80% growth and it now comprises 60% of revenue compared to 51% of revenue in the year-ago quarter.
There were ample questions about why MongoDB was able to weather the weakness in consumer-facing businesses better than Snowflake. The management feels they are more insulated because their consumption is tied to the value and usage of the applications and databases are not something that can be shut on, shut off or moderated by choice.
Here is the exact quote:
So the people are not using their application, something has gone wrong. So the more they use the application, the more value they’re seeing. So there’s a direct correlation between the value they get from the apps running on MongoDB and the value we get from those customers. Other software companies that you mentioned, I think are being forced to consider alternatives to be because there’s a trend where there’s a slight mismatch between price to value because as they suck in more data, it’s not completely clear how much incremental value that data is providing. So we don’t see that problem.
Probably the biggest contrast between Snowflake’s call and MongoDB’s call was that Snowflake noted a slowdown in a few of their biggest customers while MongoDB noted only a slowdown in their self-serve and mid-market. MongoDB also emphasized they are well diversified with six times more customers than Snowflake “tens and tens of thousands of customers” and due to representing more industries.
Conclusion:
We had stated the following:
“As stated above, MongoDB’s cash flow margin is what can keep the stock strong given stock based compensation is weighing on GAAP operating margin. We want a meet/beat on revenue, strong Atlas growth (bonus for acceleration) and we must continue to have a healthy, positive cash flow margin.
Analyst consensus has MongoDB reaching profitability on an adjusted basis by calendar year 2023.”
MongoDB proved they can become profitable on an adjusted basis in calendar year 2022 so that’s a plus. The company maintained its cash flow positive status. There were beats and raises alongside conservative guidance, which was really the ticket this quarter. It was easily the better report over Snowflake primarily because Snowflake has begun to concern analysts that the exposure to consumer could cause the company to become discretionary (more information is needed beyond one quarter). Meanwhile, MongoDB clearly illustrated this quarter its document databases are not discretionary.
Twilio’s most recent earnings report saw a severe 17% drawdown due to lower-than expected guidance. The company guided for $0.01 to $0.02 EPS versus analysts expecting $0.07 per share. Meanwhile, the company beat on earnings at 3 cents per share compared to an expected 1 cent per share, according to Refinitiv. Revenue came in at $295.1 million compared to $287.8 million expected by analysts.
The company missed estimates for the net-dollar retention rate, which came in at 132% compared to 138% expected. This was an oversight by analysts, as the 132% is quite healthy for a company of Twilio’s size. The median net-dollar retention rate for cloud software is at 104%. Twilio cites the miss as running up against the law of large numbers, which is a fair assessment.
Although I do not foresee rapid, hockey stick growth in Twilio’s future due to mobile maturation, there are some fundamental strengths to Twilio that the market will likely respond positively to.
For instance, Twilio’s revenue is growing at 75% year-over-year, the company has crossed a $1 billion run rate, and the company has positive EPS with a consensus expectation of 92% EPS growth next year. Current fiscal EPS is $0.13 EPS for the year ending December 2019 and consensus is annual EPS of $0.26 EPS ending December 2020.
Current fiscal revenue is expected in the $1.16 billion range with fiscal 2020 revenue in the $1.46 range for 31.45% growth.
PRODUCT
Twilio enables communications for mobile applications, such as voice or text. When you text or make a call inside of a mobile application, you are likely using Twilio’s APIs. The company works with over 1,000 mobile carriers in over 150 countries for voice and text/SMS services.
A few examples:
• Customer service calls on Zendesk are made through Twilio
• Powers Facebook’s Whatsapp for availability inside of other apps
• Messaging home owners inside the AirBnB app
• Using the Uber or Lyft app to call your driver
• When Netflix notifies you of new programming that meets your profile, they are using a Twilio product
• Messaging businesses or receiving notifications about a dinner reservation inside the Yelp application
Twilio has high switching costs and is one of the only solid VoIP/CaaS options for native mobile applications available. It’s very challenging for their existing customers to go with another VoIP/CSaaS service due to the required time to develop new features and test these features. This is a major plus.
The company caters to developers and this is another reason Twilio has done well, as developers decide the APIs for applications (i.e. not the CEO or a CTO). Twilio states they have 5 million developers as customers, which is about 20% of the 26 million developers in the world today.
Competitors include Bandwidth, a company that is also a network carrier. As a network carrier, Bandwidth is able to undercut Twilio on pricing with cheaper outgoing and incoming calls plus free incoming SMS. Twilio costs $1 for a dedicated number while Bandwidth costs $0.35 per dedicated number. Bandwidth is the network provider for Google and Skype, however, it’s uncertain how many developers use the service for native mobile applications.
Another competitor is Nexmo, who was acquired by Vonage, and is second to Twilio for global presence with coverage in over 90 countries. Nexmo has attempted to undercut pricing by charging per second rather than per minute, yet is more expensive than Bandwidth. It is more likely that United States developers would choose Twilio over Nexmo.
I am less concerned with the competitors and more concerned with the risks associated with mobile saturation. It can be challenging to quantify the impact of a burgeoning technology that begins to plateau. For instance, on one hand, the trajectory of mobile app revenue is expected to nearly double between 2020 and 2023, from $581 billion to $935 billion. But on the other hand, 77% of app usage is spent inside of three applications and 96% of app usage is spent on the top 10 applications.
The issue is what will happen to the other 1.8 million apps on the App Store, and 2.4 million apps on the Google Play store, who are fighting for the remaining 4% of app usage time? That’s where saturation comes in as consumers consolidate their time across fewer apps and become harder to convert to new services or applications (the thrill is gone, essentially).
Twilio is a stable choice that should clear fundamental benchmarks that Wall Street rewards, which is why we are covering the company. Twilio may not be the biggest breakout story of 2020, but is a stable growth story. There should be a noticeable boost for Twilio when 5G is more widespread, however, it requires new applications to be developed for 5G for Twilio to benefit.
Twilio is Pivoting Beyond Mobile Applications …
Twilio has strong leadership that has been with the company since inception and is well ingrained in the mobile developer community. There was a time, in 2009-2010, when Twilio had the largest presence at mobile conferences and was everywhere (no exaggeration). Today, the company is much quieter and working on how to expand beyond mobile.
SendGrid Acquisition
Twilio completed the SendGrid acquisition in February of this year, a company that allows developers to create email messaging and marketing strategies through APIs. The acquisition will help Twilio to become an omni-channel offering for companies to communicate with their customers.
Based on the closing price around the time of the acquisition, the all-stock deal was valued at $3 billion, up from the $2 billion amount at the time the acquisition was announced due to the strength of cloud stocks in end of January/early February of this year.
Twilio paid 18 EV/sales for SendGrid if calculated on the last full annual revenue reported in 2017, or 13-14 EV/sales if based on the annualized 2018 revenue.
According to Morningstar, the acquisition is value-neutral. Twilio and SendGrid have both stated they aim to be accretive on revenue while re-investing any savings on expenses to grow the business. Twilio had stated the annualized 2018 income would be $734 million, compared to Twilio’s $650.1 million. The company also stated on a conference call that the gross margins would be 59%, up from Twilio’s gross margin of 47.5%.
Twilio Flex
Twilio launched Flex a year ago, a cloud-based platform for routing calls and engaging with hundreds or thousands of customers. This is a move towards enterprise companies who require a user interface (or dashboard) and a full stack contact center they can customize.
Conclusion:
As stated above, Twilio is a stable choice that should clear fundamental benchmarks. The company is priced at current EV/sales of 11.87 and forward EV/sales of 10.71. This is currently one of the lowest valuations in the category while forward EPS consensus is one of the highest in the category.
Technical Analysis
The technical structure of most cloud stocks is lining up with the fundamental outlook. In other words, while the cloud complex is clearly in a sentiment driven correction, the growth in cloud is just getting started. Next year, it’s estimated that software-as-a-service will grow by 17%, which, once this correction plays out, should lead to a new uptrend to all new highs.
Digging a little deeper, most of these stocks are clearly in a second wave, showing an overlapping corrective structure. Twilio and Alteryx are not exceptions (we are releasing a PDF on AYX shortly). Typically, second waves flush any remaining optimistic sentiment, causing investors to feel like the initial move up was false, and the current downtrend is here to stay.
However, what follows the 2nd wave is a more important 3rd wave, which is what we want to participate in. The standard target for the 3rd wave’s completion is around 161.8% the length of the first wave, so this move to all new highs will be notable. With Twilio’s revenue growing from $1.16B to $1.46B and analyst consensus of 92% EPS growth, as long as we avoid a larger macro pullback/recession, our goal is to add to cloud positions for this 3rd wave.
The red Fibonacci lines on the right indicate the retrace levels from the entire uptrend, which started in May of 2017. The Blue lines indicate the extension of the first leg down (A wave), assuming the first leg has bottomed and we are in a corrective retrace (B wave). The cluster gray lines indicate Fibonacci price levels taken from various swing lows based on Twilio’s price action, which is meant to reveal clusters of important price regions. When these regions line up, it signals a potential bottom, and trend reversal.
My count has Twilio completing it larger degree 1st wave in red, and is currently in its 2nd wave retrace. The charts suggest that Twilio, like most cloud stocks, has not completed the retrace. Cloud stocks, and Twilio, will likely continue another leg lower, which is when I will consider this a buying opportunity. It will be in this correction that the sentiment towards cloud stocks will likely hit bottom, and be ripe for a reversal.
There is a high level of Fibonacci clusters around the $86, $73, $63 price region. These levels will be my targets for a potential counter trend position, and I will be looking for signs of a bottom as the price approaches these levels.
Twilio is currently finding resistance just under the 23.6% retrace level at the $97-$103 price region. Furthermore, this level coincides with two huge volume spikes, both of which were initiated at the $100 level. This level will be difficult for Twilio to overcome, not only because it’s a key Fibonacci resistance level, but also because large amounts of money exited the stock at this level.
The internals of Twilio also suggest more downside. The RSI has clearly broken into bearish internals, finding it difficult to break the 50 line, let alone the 60 line. I will want to see the RSI break the 60 line, and shift into a more bullish posture before considering the correction to be over.
Furthermore, the MACD has begun to roll over again, suggesting that the downside is not over just yet.
My primary game plan is to initiate a position at lower levels. However, I will abandon this thesis, and assume the bottom is in if: TWLO can break through the 50 and 200-day MA; then break through the 61.8% retrace level with heavy volume, and do so with a 5-wave structure.
In conclusion, the first leg of the downturn appears to have ended, and we have retraced to heavy resistance at the $97-$103 price region. If Twilio cannot breakout here, expect the next leg of this downturn to flush out the remaining sentiment, while price finds support within the price zones listed above. The first support zone will be around $86, then $73, followed by $63. I will look to layer in my position as Twilio makes its next leg lower.
