The chop of earnings season is almost done.
As the latest information is assimilated, stock prices will move up and down.
Sometimes violently so.
But this time of flux can be an opportunity for those who have done their homework.
The key right now is finding the right signals in amongst the wider market noise.
With that in mind, one result caught my eye last week.
It proves to me there’s a lot more substance behind the recent AI hype than critics realise. If you know where to look.
Let me explain…
Why’s a relatively obscure database company catching my attention?
The result that caught my eye wasn’t from one of the well-known ‘blue chips’.
Indeed, you mightn’t even have heard of this stock.
It was from a US company called MongoDB Inc [NASDAQ:MDB].
They specialise in cloud databases for developers and have been around since 2007.
As the blurb on their website says:
‘For the next generation of intelligent applications. Build applications on the industry’s first developer data platform. From AI-powered and event-driven apps to edge use cases and search, build fast and at the scale users demand.’
Since listing on the Nasdaq in 2017, the stock has risen a whopping 1,188% — from US$24 to US$392 in six years.
Not bad.
But why’s a relatively obscure database company catching my attention these days?
As I see it, MongoDB is sitting right at the heart of the action when it comes to a bigger story playing out.
I’m talking artificial intelligence (AI).
AI is all about gathering, sorting, and processing data. And to do that you need cutting-edge, widely used database infrastructure.
That’s what MongoDB is.
And why I think it’s the kind of stock worth paying attention to.
We all know Nvidia is surging on the back of this year’s AI hype. And the now US$1.2 trillion company backed up the hype with some solid earnings growth two weeks back.
They crushed analyst expectations by reporting earnings almost double what was expected.
As CEO Jensen Huang put it:
‘A new computing era has begun. Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI,’
The AI naysayers have crawled back into their holes for now.
But here’s the thing…
MongoDB and some smaller companies like it are also poised to catch the AI wave coming our way over the next few years.
The way I see it, if the hype is real, the proof of the pudding will be found in companies like this.
And news last week suggests the party has started here too.
Last Thursday, MongoDB surprised analysts by exceeding expectations on both revenue and earnings.
As reported:
‘For the quarter ending July 31, MongoDB reported adjusted earnings per share of 93 cents, up from a loss of 23 cents per share in the same quarter of last year, on revenue of $423.8 million, up 40% year-over-year. Analysts were expecting a far more modest 46 cents per share on revenue of $393.68.’
That’s a pretty big beat, and the stock jumped 7% on the day of the release. It’s up 60% this year.
CEO Dev Ittycheria noted on the results:
‘We are at the early stages of AI powering the next wave of application development. We believe MongoDB provides developers a unified platform that supports both the foundational requirements necessary for any application and the exceptionally demanding needs of AI-specific applications, making our competitive advantage even stronger in the world of AI.’
Incidentally, the US$28 billion company has partnerships with both Google Cloud and Microsoft, as well as US$1.9 billion cash in the bank.
I’ll come back to the importance of this point later on.
But as I said before, this is a company sitting in the AI sweet spot.
The next few quarters will show just how much legs this company has.
But as is always the case with investing, if you wait for 100% proof you’re right, you’re usually waiting far too long!
First width, then depth
A last point of interest on this topic…
It’s worth understanding how software companies like MongoDB make money.
The most common form is a subscription model where users opt into a variety of products to suit their needs.
MongoDB explain their business model as relying on new customer growth in the short term, but long-term financial success is about upselling existing customers to more product lines.
It’s about width first, then depth.
But there’s also a third very important determinant of revenue.
And that’s simply the price they charge.
If you can charge more and not lose too many customers, then you should do it. In my undergraduate economics class this was called the ‘elasticity of demand’.
I mention this because I recently came across a note in The Information that stated most software companies are in the midst of raising prices right now.
They wrote:
‘Price increases for enterprise software firms are likely to underwrite revenue growth in the next year or so. Various companies in the sector have announced price increases in the past 12 months — from Salesforce to Shopify — in at least some parts of the world.’
This is an interesting trend to take note of if you’re investing in this space.
It means software companies that can pull this off without losing too much custom could see revenues rise significantly over the next 12 months.
On the other hand, those that can’t do this — either because their products aren’t sticky enough or they have tough competition — are likely to do worse.
It may be the case that the giants like Microsoft (that can bundle software packages together) do better in this environment.
But specialists, like MongoDB, that have big tech distribution may also be big beneficiaries of this trend.
As always, you need to dig deeper to understand the nuances of each business case.
But to me, it seems clear that the twin trends of big data and AI are going to be huge drivers of value in the software business over the next few years.
The key will be finding the big winners in amongst the flux.
Good investing,
 |
Ryan Dinse,
Editor, Money Morning
PS: I recently put together a report on the opportunities emerging in the fast-changing microchip sector. You can access this here.
