Calculating The Fair Value Of MongoDB, Inc. (NASDAQ:MDB)

MONGODB +1.74%

MONGODB

MDB

262.76

+1.74%

Key Insights

  • The projected fair value for MongoDB is US$386 based on 2 Stage Free Cash Flow to Equity
  • With US$384 share price, MongoDB appears to be trading close to its estimated fair value
  • Analyst price target for MDB is US$447, which is 16% above our fair value estimate

How far off is MongoDB, Inc. (NASDAQ:MDB) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for MongoDB

Crunching The Numbers

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$103.0m US$131.1m US$235.1m US$591.8m US$713.0m US$1.11b US$1.42b US$1.71b US$1.97b US$2.19b
Growth Rate Estimate Source Analyst x13 Analyst x15 Analyst x16 Analyst x6 Analyst x4 Analyst x3 Est @ 28.43% Est @ 20.58% Est @ 15.10% Est @ 11.25%
Present Value ($, Millions) Discounted @ 7.3% US$96.0 US$114 US$190 US$446 US$501 US$724 US$866 US$973 US$1.0k US$1.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$6.0b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.3%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$2.2b× (1 + 2.3%) ÷ (7.3%– 2.3%) = US$45b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$45b÷ ( 1 + 7.3%)10= US$22b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$28b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$384, the company appears about fair value at a 0.5% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
NasdaqGM:MDB Discounted Cash Flow April 29th 2024

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at MongoDB as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.3%, which is based on a levered beta of 1.092. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for MongoDB

Strength
  • Cash in surplus of total debt.
Weakness
  • Shareholders have been diluted in the past year.
Opportunity
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
  • Current share price is below our estimate of fair value.
Threat
  • Debt is not well covered by operating cash flow.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For MongoDB, we've compiled three important elements you should consider:

  1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with MongoDB , and understanding these should be part of your investment process.
  2. Future Earnings: How does MDB's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGM every day. If you want to find the calculation for other stocks just search here.

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