Shares of MongoDB (NASDAQ:MDB) have been on an absolute tear since the company went public in Oct. 2017. Founded in 2007, MongoDB listed on the NASDAQ at an IPO price of $24 per share. It spiked to $32.07 per share at the end of its first trading day. The stock has climbed to $159.94 as of this writing.

The stock has easily outperformed the S&P 500 as seen in the below chart. Even if you bought the stock at the end of its first trading day, you'd be sitting on a return of nearly 400% in less than three years' time.

MDB Chart

Data by YCharts.

But we know that historical returns matter little to prospective investors. What they want to know is if the stock remains a solid buy at its current price. Let's dive deep into MongoDB's business model, key trends, and growth drivers to determine if it remains a good bet for long-term investors.

What does MongoDB do?

Enterprises across industries are leveraging software applications to engage with their customers and gain a competitive edge. A database is at the core of every software application, which needs a database to store, manage, and process data.

MongoDB provides a general purpose database platform that enables enterprises to build and modernize applications in a cost-effective manner. The company's database platform was designed for unstructured data, including videos and images that are being generated in massive quantities.

The MongoDB platform can be deployed at scale in a hybrid, on premise, or private cloud environment. This platform is built on an architecture that is vastly different from a traditional database system that has columns, rows, and tables. You can find a more detailed explanation of the two types of databases in this Couchbase report.

Huge addressable market

Market research firm IDC believes the data management software market will grow from $71 billion in 2020 to $97 billion in 2023, an annual growth rate of 11%. MongoDB has a first-mover advantage in the document-based database segment and is growing at a far higher pace than the overall market.

In fiscal 2020, MongoDB sales were up 58% to $421.7 million. This growth was driven by the company's ability to expand its customer base as MongoDB ended the year with a customer count of 17,000, up 27% from 13,400 in fiscal 2019. Notably, the number of high-value customers (those contributing $100,000 or more of revenue to the company) grew 35% over the same period to over 750.

In today's digital age, selecting a database is an important strategic decision that affects a developer's productivity as well as organizational competitiveness. MongoDB claims that relational databases were not built to support huge volumes of data.

A cloud-based ecosystem

Image source: Getty Images.

Furthermore, some relational databases were also built before cloud computing was commercialized, making it difficult to integrate them with global deployments and giving MongoDB an opportunity to drive sales higher in the upcoming decade as well.

MongoDB accounts for just 0.6% of the total data management software segment and has plenty of room room to gain market share in the next few years. 

What's going right for MongoDB?

Like many enterprise-facing companies, MongoDB generates a significant amount of sales from subscriptions. In 2020, subscription revenue accounted for 95% of the top line and was up 61% over the prior year. Customers rarely tend to switch enterprise software providers due to high associated costs in terms of training and data migration.

A steady stream of subscription revenue helps to offset cyclicality and reduce volatility, which is extremely critical in today's uncertain environment. Additionally, it is easy to scale software services with minimum investments, and it is also a high-margin business.

MongoDB continues to depend on Atlas, which accounted for 41% of revenue in the fiscal fourth quarter. The MongoDB Atlas is a cloud-based database platform for modern applications and is built for teams that spend a considerable amount of time building applications.

Atlas helps the client gain critical insights to help them expand go-to-market strategies and their customer base. This cloud service now has over 15,000 customers in just three years since launch and remains a key revenue driver.

Why the stock will be volatile in the near term

The COVID-19 pandemic has sent markets tumbling in the last two months. MongoDB stock fell 45% between Feb. 19 and March 16 (its year-to-date peak to trough). However, shares have since recovered 62%.

In the first quarter of fiscal 2021, MongoDB is guiding for sales between $119 million and $121 million. For the full year, the company expects sales of $510 million to $530 million. At the midpoint of this range, sales growth would amount to about 23%.

During the latest earnings call, MongoDB CFO and COO Michael Gordon stated, "Like many global organizations, we believe our operations will likely be impacted by the slowdown in economic activity that is occurring globally. [...] Our current assumption is that the disruption caused by COVID-19 will impact Q1 revenues by approximately $1 million to $2 million and fiscal '21 revenues by approximately $15 million to $25 million due to anticipated weaker bookings in the first half of the year."

The company will benefit from high subscription sales going forward, but global enterprises will also lower their spending to cope with the impact of COVID-19, which might hurt MongoDB's ability to grow its customer base in the near-term.

If markets continue to move lower, MongoDB stock may also lose significant momentum given its high valuation metrics. MongoDB has a forward price-to-sales ratio of 18 and won't report profits for several more years. It continues to spend heavily on sales and marketing, and unprofitable growth stocks tend to be hit hardest in a broad market sell-off.

But while most stocks will be volatile in 2020 due to the current environment, MongoDB's expanding addressable market, growing customer base, and leadership position in its segment make it a solid pick for long-term investors.