Are Investors Ignoring This High Potential Stock?

Database platform company Couchbase (NASDAQ:BASE) has risen by over 29 percent year-to-date, climbing alongside many other promising tech companies.

While Couchbase is a small player in the database software industry, this increase in share prices signals considerable interest from growth investors.

With the company valued at under a billion dollars still, investors may also find themselves wondering whether Couchbase is undervalued?

How Couchbase Helps Businesses

Couchbase offers two primary NoSQL database products. The most crucial of these is its cloud database-as-a-service product, Couchbase Capella which allows organizations to store their data on a managed cloud database with high speeds, scalable storage and easy mobile integration.

Capella is also equipped to store and process IoT data. For customers who favor on-premise data storage, Couchbase also offers a more traditional database platform called Couchbase Server.

Couchbase’s products allow companies to easily store, query and analyze data and its platforms facilitate integration of Big Data and analytics tools within a single, unified programming environment.

A good example of Couchbase’s ability to store and organize disparate forms of data can be found in the case of telecommunications giant Comcast. With multiple ways for customers to interact and notes stored in many different applications. Comcast has struggled to create unified, simple data profiles for its customers.

Via Couchbase, Comcast figured out how to create a single profile for each of its customers and improve customer experiences. Because of Comcast’s massive size, it also serves as a good example of Couchbase’s ability to scale up to the needs of even its largest customers.

Growth Has Slowed & Profitability Elusive

In Q2, Couchbase reported total revenue of $43.1 million, up 8 percent from the year-ago quarter. Annual recurring revenue rose by a much more respectable 24 percent to $180.7 million. The company lost $0.44 per share, up from $0.34 last year. Total operating losses extended from $15.2 million to $21.9 million.

Couchbase’s key challenge is related to its bottom line because it’s not yet profitable and is losing money at a rapid rate. In the past fiscal year, Couchbase lost about $68.5 million.

Its net margin, meanwhile, was -46 percent. While losses are expected to improve in the coming fiscal year, analysts still expect the stock to lose about $1.30 per share.

Current projections suggest that the company will further lose between $0.30 and $0.40 per quarter through at least Q1 of 2025.

Worse still is the prospect of slowing revenue growth. The company reached a year-over-year revenue growth rate high of 33.3 percent in Q2 of 2022. Since then, revenue growth has declined steadily to its current level of just 8 percent.

In a more mature, profitable company, this would be a respectable and sustainable level of growth but Couchbase is still losing money at a fairly rapid pace, so much higher levels of growth are needed to propel it toward a break-even point.

Looking forward, Couchbase estimates modest growth in the upcoming quarter. Revenue of up to $43.4 million and ARR of up to $188 million are expected, though these may not be sufficient to drive the stock up appreciably from its current levels.

How Do Analysts Rate Couchbase?

Despite the company’s uphill road to profitability, analysts remain mostly bullish on Couchbase.

The median 12-month target price for the stock, based on 10 analyst forecasts, is $21 per share. That represents a potential gain of 21 percent from the current level.

BASE enjoys a consensus Buy rating, and none of the analysts covering Couchbase currently rate it lower than a Hold.

Because the company is far from turning a profit its market cap is primarily based on the expectation of future earnings.

With this in mind, Couchbase seems to trade at a multiple to its sales that is not fully justified by the current rate of revenue growth. BASE’s price-to-sales ratio is currently 4.96, while its price-to-book is 5.92.

While analysts are generally upbeat, how does BASE fare relative to its better-known competitors?

Couchbase vs MongoDB

Three of Couchbase’s primary competitors are MongoDB, Apache Cassandra and HBase. MongoDB is of particular interest to investors, as it is publicly traded and can be used as a comparative measure of Couchbase’s valuation.

On the surface, MongoDB appears to trade at much more of a premium than Couchbase. It is currently priced at 19.7 times sales, and the debt-to-equity ratio of 1.3 suggests that the company is on less secure financial footing than Couchbase.

MongoDB is, however, much closer to overall profitability with a trailing 12-month net margin of -16.2 percent.

Further, MDB is still reporting strong double-digit revenue growth rates, a fact that may help to justify a higher price than Couchbase.

From a competitive standpoint, it’s also worth noting that MongoDB has a significant edge in the current market. Its share of the NoSQL database market stands at nearly 45 percent, compared to just 2.3 percent for Couchbase.

MongoDB has also leaned into AI technology, making it easier for organizations to derive deep insights from their data with the latest in artificial intelligence tools.

Turning to Hbase and Cassandra, these two database tools fall between MongoDB and Couchbase in terms of market share. Cassandra maintains a market share of about 5.3 percent, while Hbase accounts for another 4.4 percent.

Comparing the market share of Couchbase to those of its three closest competitors, it becomes quite clear that the company does not have an appreciable moat around its business at this time.

So, Is Couchbase Undervalued?

According to a discounted cash flow analysis, Couchbase is fairly valued at this time with an intrinsic price per share of $17.30

With revenue growth slowing to the single digit percentage levels and the NoSQL market already dominated by another large, publicly traded competitor, MongoDB, Couchbase appears to be priced to perfection.

This problem is further compounded by Couchbase’s steep losses. With the company slipping further away from profitability over the past year, there is little reason to expect Couchbase to turn a profit anytime soon.

Even if it generates significant earnings at some future point, investors may incur steep opportunity costs by waiting for Couchbase to take off.

Couchbase may also suffer from the recent general decline of high-growth tech stocks. With higher interest rates making investors less risk-tolerant, companies whose share prices are dependent on high future growth rates have been declining steadily in recent weeks.

The Federal Reserve’s policy of keeping interest rates high well into next year could continue to put downward pressure on tech stocks, including Couchbase.

Taking its current performance, growth prospects and competitive position into account, Couchbase is not a bargain at its current price. Without a significant growth catalyst, investors may not see appreciable returns from the stock for quite some time.

The downside potential created by higher interest rates and stagnant revenue growth, meanwhile, likely makes Couchbase a riskier stock than many investors would be comfortable with.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.