Software as a service (SaaS) is one of the most popular forms of cloud computing that enables users to connect to and utilize cloud-based products over the Internet. The demand for SaaS solutions is estimated to grow as companies around the world adopt SaaS products for different business functions. According to Financial News Media, the global SaaS industry is expected to reach $307.3 billion by 2026, growing at a CAGR of 11.7%. Consequently, businesses from this industry should benefit.  

Given this backdrop, I am going to analyze and compare two SaaS companies: MongoDB (MDB) and Snowflake (SNOW), to determine which one is a better buy at current levels. 

Founded in 2007, MDB is a New York-based company that offers a general-purpose database platform around the world. It provides access to different enterprise software, including MongoDB Enterprise Advanced, MongoDB Atlas, and Community Server. Over the past six months, shares of MDB have returned about 16%.

SNOW is based in Bozeman, Montana, and offers a cloud-based data platform that grants users to merge data into a single source of truth.  SNOW  is also trading 16% higher over the past six months.  

Recent Developments 

On January 12th, Barclays Capital upgraded SNOW stock to Overweight from Equal Weight amid the recent sell-off, which presently offers investors “an attractive entry point.” However, the analyst lowered Snowflake’s price target from $393 to $367. The firm also noted SNOW’s “growth profile, scale, and importance to customers” as an argument for its bullish bias. In December, the company received another upgrade at Citigroup with a price target of $470. 

Recent Quarterly Performance & Analysts’ Estimates

MongoDB last issued its earnings results on Monday, December 6th. The company’s total revenue for its fiscal third-quarter of 2022 rose 50.5% year-over-year to $226.89 million, beating Wall Street estimates by $21.71 million. The increase in revenue was mainly driven by a 51% year-over-year increase in subscription revenue to $217.87 million, reflecting increased demand for MDB's platform and related services. In Q3, its gross margin was improved by 100 bps to 70%. 

However, the company's total operating expenses increased 44.52% from the year-ago value to $235.2 million, leading to a net loss of $81.29 million. As a result, MDB's Non-GAAP EPS stood at ($0.11), topping analysts' estimates by $0.27. 

For the next quarter, analysts expect MDB's EPS to come in at ($0.20), representing a 39.30% year-over-year growth. Its revenue for the fourth quarter of 2022 should advance 42.47% YoY to $243.63 million.

On December 1st, Snowflake reported earnings for the third fiscal quarter of 2022. The company’s total revenue grew 109.5% year-over-year to $334.41 million, primarily driven by a 110% year-over-year increase in its product revenue to $312.5 million. Also, SNOW topped the Wall Street revenue estimates by $28.28 million. 

In Q3, the company’s total customers came in 52.4% higher YoY at 5,416 with a net revenue retention rate of 173%. Besides, Snowflake reported a GAAP EPS of ($0.51), beating analysts' consensus by $0.10. 

A $0.02 consensus EPS estimate for the fourth quarter represents an improvement compared to its year-ago value of ($0.16). Moreover, SNOW's Q4 revenue is expected to increase 95.70% year-over-year to $372.7 million in the current quarter.

Comparing Options Market Sentiment 

Looking at the February 4th, 2022 option chain for both MDB and SNOW, we can define options market sentiment by analyzing the open interest levels. In MDB's occasion, the open calls/open puts ratio at the $400.00 strike price comes in at 0.15x, indicating a bearish options market sentiment. When it comes to SNOW, the open calls/open puts ratio at the $290.00 strike price stands at 2.34x, demonstrating a bullish sentiment.  

The Bottom Line

While MongoDB and Snowflake should benefit from the SaaS industry’s growth, I believe Snowflake is a better pick because of its better financials, higher forward growth rates, bullish options market sentiment, and favorable analyst coverage. 

MDB shares rose $2.23 (+0.58%) in premarket trading Wednesday. Year-to-date, MDB has declined -26.42%, versus a -3.52% rise in the benchmark S&P 500 index during the same period.

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.

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