Last time, I looked at the innovative power of HubSpot (NYSE:HUBS) and came away pleased. Can we say the same about MongoDB (NASDAQ:MDB), another Motley Fool Rule Breakers pick that's showing signs of capturing the imaginations of the millions of developers who use the product daily?

You'd certainly think so from the most recent quarterly results. Total revenue was up 61% in the second quarter, while the company's customer count -- now 7,400 -- rose 72% year over year. Also, the company's higher-margin cloud database, Atlas, now accounts for 18% of revenue. Signs point to a long-term winner that's positioning itself to challenge Oracle (NYSE:ORCL) to be the database of record for companies large and small.

Ambitious, effective innovation will be required to make continued gains against a hard-nosed competitor like Oracle, so it's worth understanding how effective MongoDB's research and development (R&D) efforts have been to date, and whether we have reason to expect even better results. Let's go under the hood and apply my four-question test.

Light bulb with the word innovation

Innovation isn't just about bright ideas. Source: Getty Images.

Revisiting the innovation test

You may remember that I created the innovation test as a way to understand the quality of engineering efforts when making a complex product with Rule Breaking potential. Here are the four core categories and the questions within:

1. Organic growth: Does the company have internally developed products? What are they and when were they released?

2. R&D output: Is overall revenue growing faster than R&D investment over the period when these products were released? By how much?

3. Pricing power: Is gross margin expanding?

4. Pipeline: Can you point to evidence of new products being developed? How soon will they be released?

"Version 1.0" of the test was serviceable enough, featuring just yes or no answers. But then a closer look at some other companies revealed a flaw: What if some attributes are more valuable than others?

Motley Fool CEO Tom Gardner put that question to me. Since it's generally good for job security to listen when the chief executive speaks, version 2.0 of the innovation test includes a sliding-scale scoring system. Here's how it works:

  • Plus 2 for a yes to question No. 1; plus 1 if the company has gotten a significant portion of its growth from acquisitions, yet managed to still integrate and create winning products (think Disney and Salesforce), and 0 if you can't identify sources of organic growth.
  • Plus 1 or 0 for question No. 2. An early stage company might invest more heavily in R&D in anticipation of releasing breakthrough products, but it's better to see a company gain leverage from experiments sooner in the cycle.
  • Plus 1 or 0 for question No. 3. Since gross margin reflects a degree of pricing power, we prefer to see innovation lead to demand, leading to pricing power.
  • Plus 1 or minus 1 for question No. 4, since innovators always have new products in the pipeline.

In tweaking, I'm placing a bit more emphasis on organic growth and penalizing one-hit wonders that have a great product but nothing in the pipeline.

Survey says?

Now, on to our quiz. Here's how MongoDB rates as an innovator:

1. Does MongoDB have internally developed products? If so, what are they and when were they released?

Yes (plus 2). There are two primary ways the company delivers its database system. MongoDB Enterprise Advanced encompasses everything and is built for on-premises, hybrid, or pure cloud environments. MongoDB Atlas is cloud-native and a more powerful version of the company's free Community Server product.

While the Enterprise Advanced product is a direct descendant of the first iteration of MongoDB that founders Dwight Merriman and Eliot Horowitz developed in 2007, Atlas includes encryption and compression from the company's 2014 acquisition of WiredTiger. Expect further enhancements in 2019 when the company fully integrates its October acquisition of San Francisco-based mLab.

2. Is subscription revenue growing faster than investment in R&D over the period when these products were released? By how much?

Yes (plus 1). Subscription revenue from use of Enterprise Advanced and Atlas is up 141.5% from fiscal 2016 to fiscal 2018. Total revenue including services rose 136.6% over the same period, while R&D investment increased just 42.9% during that time frame. Note we're only looking at three years of data, but that's only because it's what we have.

3. Is gross margin expanding?

Yes (plus 1). Gross margin improved from 68% in fiscal 2016 to 72.3% in fiscal 2018 and 72.1% over the trailing 12 months.

4. Can you point to evidence of new products being developed? How soon will they be released?

Mostly (plus 0.5). In acquiring mLab, MongoDB has signaled a long-term ambition to grow cloud installations. I'm expecting the company to pour R&D dollars into growing the functionality of Atlas and expand the user base. 

At the same time, I'm encouraged by news that MongoDB is changing licensing terms to close a loophole where applications built with the free Community Server version were delivered as a service using public clouds. This workaround, though perfectly legal under the broad-based GNU license governing most open-source software, makes it attractive for developers to avoid Atlas. So while it's hard to know which new products MongoDB has in the works, it's clear the company is aiming higher, and aiming to protect its ability to generate revenue, profit, and cash flow in the process.

With 4.5 out of the maximum 5 points, it's clear to me that MongoDB is an innovator with a lead in an important market, which improves the odds of the stock beating the market by a wide margin in the years to come.

Tim Beyers owns shares of HubSpot and MongoDB. The Motley Fool owns shares of and recommends HubSpot and MongoDB. The Motley Fool owns shares of Oracle and has the following options: short December 2018 $52 calls on Oracle and long January 2020 $30 calls on Oracle. The Motley Fool has a disclosure policy.