MongoDB (MDB -4.35%) released better-than-expected fiscal fourth-quarter results this week. And with the recent market sell-off because of the coronavirus, the stock is off by about a third from its all-time highs one month ago. Besides, the impact of the coronavirus on the company's disruptive database business seems limited.
Given these events, MongoDB looks much more attractive than it was a few months ago. Still, investors should remain prudent as valuation remains high when you consider the three following developments.
1. Revenue growth deceleration
During the last quarter, revenue exceeded management's guidance and reached $123.5 million, up 44% year over year. That strong growth was due to the solid performance of the company's database products. MongoDB sells unstructured database solutions that disrupt the multidecade-old relational database technology. MongoDB's solutions provide developers with increased flexibility to develop applications that can leverage data that don't have to be structured in a way that fits the rigid format of legacy databases.
Also, the company is increasing its cloud-based business with its product Atlas, which grew 80% year over year. Atlas represented 41% of total revenue, up from 32% one year ago.
Looking forward, management anticipates revenue growth to slow down to 23.3% during fiscal 2021, based on the midpoint of the guidance range of $510 million to $530 million. Granted, management took into account $15 million to $25 million of revenue losses because of the coronavirus. But even if you exclude this negative impact, the corresponding revenue growth deceleration to 25.7% remains disappointing.
2. Increasing losses
MongoDB's revenue growth doesn't come for free. Like many high-growth tech businesses, the company is spending a significant portion of its revenue on sales and marketing expenses to expand its customer base and gain scale. During the last quarter, sales and marketing expenses represented 54% of revenue, up from 50% last year.
As a result, losses under generally accepted accounting principles (GAAP) increased to $62.6 million compared to $22.2 million one year ago despite the company's growing scale. And since management expects to ramp up its sales and marketing efforts, it forecasts non-GAAP loss from operations to land in the range of $68 million to $78 million compared to a non-GAAP loss from operations of $53.7 million in 2020. Thus, investors should keep in mind that GAAP profits seem far away.
3. Co-founder CTO leaving
Besides its revenue growth deceleration and increasing losses, MongoDB may face another significant challenge. The company announced co-founder and CTO (Chief Technological Officer) Eliot Horowitz was stepping down as CTO effective July 10. Since MongoDB is aiming at disrupting the multidecade legacy database market against giant competitors such as Oracle, IBM, Microsoft, and Amazon, this leadership change matters.
During the earnings call, CEO Dev Ittycheria ensured a smooth transition with a strong team was already taking place, though. Besides, Eliot Horowitz will become a technical advisor to MongoDB. Yet such a change adds risks that remain difficult to quantify.
Many companies would enjoy forecasting the same revenue growth as MongoDB in the current uncertain context. But despite the drop in the stock price over the last few weeks, the market still values the company at a high forward enterprise value-to-sales ratio of 12, which doesn't leave any margin of safety for prudent investors seeking exposure to tech stocks.