My $MDB trades
Following MongoDB's Q2 report, I decided to reduce my position in MDB and move the proceeds into SNOW. While I am still confident in MongoDB's long term opportunity in the database market, they are facing some headwinds for the remainder of this year that are impacting the rate of growth and their ability to demonstrate near term profitability. I provided a full write-up on my blog, but here are few of the take-aways from the quarter that guided my decision:

  • Revenue growth will decelerate in the second half of this year due to Atlas utilization stalling in a few digital native customers (crypto exchanges, gaming, e-commerce) and enterprise customers in Europe. The mix shift of revenue from their EA licensing to Atlas is magnifying the effect.
  • Profitability measures reversed in the quarter, going from positive to negative operating and FCF margin. These were driven by the resumption of in-person events (MongoDB World) and travel. Additionally, the company doubled the number of incremental new sales hires in Q2, which I think is bullish, but will drag on expenses for the remainder of the year.
  • On the positive side, MongoDB grew Direct Sales customers by the largest sequential amount ever in Q2. Direct Sales customers represent those customers with a salesperson assigned, versus self-service web site sign-ups. This large customer cohort generates 86% of MongoDB revenue.
  • Relationships with the hyperscalers are the strongest they have been in several years, particularly with AWS. These co-sell arrangements should also drive growth of Atlas.
  • Product announcements from the MongoDB World conference are generating strong customer interest. The Relational Migrator early access program is already oversubscribed, which allows enterprise customers to more easily migrate workloads to MongoDB. They also announced several new customer wins associated with time series, analytics and search.

While the stock will be pressured for the remainder of 2022, I think this will provide a favorable set-up for 2023, as we lap Q2 of next year. When affected customers begin expanding their businesses at normal rates, these additional growth will be on top of MongoDB's normal land/expand motion, magnifying the sequential grow in 2023. With easy comps in Q3-Q4 of 2022, the annual growth rates will look very favorable again. Also, the full effect of the spike in salesperson new hires will hit by Q2 of 2023, providing another tailwind. This should drive up the number of Direct Sales and $100k ARR customers going into the new year. Expansion of large customer spend should allow the improvements to operating leverage to resume.

With all that said, the execution risk is higher than before. Given SNOW's strong quarter, I decided to shift the proceeds into Snowflake. The two stocks are down the same amount YTD, so I felt like that is an even trade-off for my portfolio.
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