MongoDB, Inc. (NASDAQ:MDB) stock has climbed over 65% since the beginning of the year, trouncing the S&P 500's single-digit gains, and has attracted the attention of tech investors. 

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Along with the stock gains, the price-to-sales ratio has run up over 40%, causing some to flinch at its lofty valuation. But this cloud database specialist is worth the price. Let's take a deeper look at its business, the growth plans, and its valuation to see why this stock could be cheaper than it looks.

The business of a cloud database

MongoDB was founded in 2007 to create a database that could address the shortcomings of legacy relational databases in powering high-performance cloud-based applications. Since then, it has become a developer favorite, consistently ranked as the top non-relational database according to DB-Engines. This popularity has helped it reach $462 million in trailing 12-month revenues and serve more than 18,000 customers in 100 countries.

Banks of servers in a cloud data center.

Image source: Getty Images.

Over the last three years, the company has had explosive growth, increasing its top line by a 61% compound annual growth rate from fiscal 2017 to its most recent fiscal year ending Jan. 31, 2020. This impressive trend continued into last quarter's 46% year-over-year top-line gain, but the company isn't profitable, as it's pouring its profits into growth efforts. A $977 million pile of cash and marketable securities provide the company with plenty of flexibility to operate this way for years.

The company has two core products: MongoDB Enterprise Advanced (EA), its on-premise solution, and Atlas, its cloud-based offering. Atlas only made up 42% of its revenue last quarter, but it's growing faster at 75% year over year and is an important element in driving overall growth.

Atlas is key to growth

Atlas was released in 2016 as a way for software developers to experience the benefits of its product more easily. As a cloud-based subscription platform, developers just need a sign-on and a credit card to get started. This simple on-ramp allows information technology teams to experiment with the platform in non-mission-critical applications before committing to the technology to take over larger portions of the enterprise. This approach has been highly successful.

Atlas customers have almost tripled from 5,700 in January 2018 to 16,800 in its most recent quarter ending April 30, 2020. What's even more exciting is that as a cloud product, the company can keep tabs on what developers are doing. This enables the company to better understand how the product is used, make improvements, and call on customers who've increased usage to discuss upselling opportunities. Although Atlas customers only average around $6,000 to $7,000 in revenue per year, it can be a path to its EA product that typically exceeds $100,000 annually. In its most recent quarter, MongoDB reported 780 customers spending more than $100,000 annually, up from 598 a year ago, a solid 30% increase.

The opportunity ahead is huge. President and CEO Dev Ittycheria shared IDC's database market projections on a recent conference call. He said the market will be $71 billion in 2020, growing to $97 billion by 2023. But some investors may still be worried about its lofty valuation.

It's pricey but worth it

MongoDB carries a price-to-sales ratio of 28, which is significantly higher than the S&P 500's average of 2.3, but it actually compares favorably to some of its infrastructure-as-a-service peers. Fastly and Okta are also in the sub-$1 billion revenue category, and have similar growth trajectories, but sport a much higher premium of 41. 

The database giant Oracle is in the table below as a comparison, but with its 43-year history, it's not really positioned as a growth stock anymore. Its annual gains have dropped to the low single digits, and it even marked a decline in its top line last quarter, as it's trying to execute a monumental shift from its legacy on-premise products to competing in the cloud.

 

MongoDB

Fastly

Okta

Oracle

3-year revenue CAGR

61%

38%*

54%

1%

MRQ rev growth

46%

38%

46%

(6%)

TTM revenue

$462 million

$218 million

$644 million

$39 billion

Market capitalization

$12 billion

$10 billion

$27 billion

$170 billion

Price-to-sales (PS) ratio

28

41

41

4.7

CAGR=compound annual growth rate. MRQ=most recent quarter. TTM=trailing 12-months. *Note: Fastly is a two-year revenue CAGR. Data from Yahoo Finance as of Aug. 3, 2020. Table and calculations by author.

Can MongoDB continue to hold on to its pricey PS ratio? The answer is likely yes. Look at software giants Adobe (PS of 18) and Microsoft (PS of 11), which justify high premiums as they continue to show double-digit revenue growth and profits too. MongoDB should continue to post strong growth, and eventually profits, as it scales into this huge market. 

Its trailing 12-month revenues put its share of the 2020 market at a tiny 0.7%. With $26 billion of new database spend coming on the market in the next few years to predominantly support cloud-based applications, there's a monster opportunity for the company. If it was able to double its share to a still tiny 1.4% of the $97 billion market, its revenue would almost triple from there.

The bottom line for investors

MongoDB's valuation may look rich, but with its proven model, its popularity with developers, and its tremendous opportunity, it has a winning formula for market-beating returns. If you buy today, looking back five years from now, it's likely that the "expensive" price you paid for this growth stock will actually look like a good deal.