Alternative database software expert MongoDB (MDB -0.54%) has been kind to investors since hitting the stock market three years ago. Share prices have grown more than sevenfold, including a massive 82% gain in 2020 alone. At the same time, MongoDB's stock has been dead in the water for a few months, trading essentially sideways since early June. Has this growth stock run out of rocket fuel already, or will MongoDB investors catch a second wind someday soon?
MongoDB's big idea
A so-called NoSQL database like MongoDB's eponymous flagship application can do pretty much anything a relational database from Oracle (ORCL -0.20%) and others can do, and vice versa. The difference between relational and NoSQL databases is that the relational model is rigidly defined and difficult to change once you've set it up. The apps you design around an Oracle database will require a lot of detailed planning and very precise data inputs, while a MongoDB-based solution can work with various data types on the fly and won't be locked in a specific data model.
If that geeky stuff went over your head, maybe investing in database software companies isn't for you. It's always best to have a deep understanding of the industry you want to invest in, especially in the fast-moving technology sector. You do have to start somewhere, though, so here's a simplified take on the nerd-speak above.
MongoDB's software is more flexible than traditional database models, which lets software developers complete tasks more quickly and easily. It's a more modern approach to a classic data management system.
NoSQL databases are easy sells in today's software development sector, so MongoDB's sales are skyrocketing. The company isn't profitable yet because management has optimized the business model for maximum top-line growth. Earnings and cash flows will have to wait a few years while MongoDB builds out a huge customer base and strong revenue streams.
Why this skyrocketing stock slowed down in June
MongoDB entered June with a full head of steam. The stock had gained 76% in the first five months of 2020 and was trading at a nosebleed-inducing 28 times trailing sales. That's mighty rich even by the standards of soaring market darlings. Database giant Oracle, for example, typically trades near 4 or 5 times trailing sales.
Two earnings reports later and MongoDB's stock price sits 3% higher, but its trailing sales have jumped 19%. The company crushed Wall Street's consensus estimates in June's first-quarter report and again in August's second-quarter update. Management also issued optimistic guidance targets, especially in the second-quarter report. Yet MongoDB's stock fell on both occasions and ended up treading water over the last five months.
Is MongoDB a buy right now?
It's not easy to impress analysts and market makers. Sometimes, your surprises just aren't big enough. Yes, that sounds silly. It's also the cold, hard truth. I'm happy to write it off as a common mistake in this high-growth corner of the tech sector. MongoDB has been improving its business even though the stock price held steady, which works out to a more inviting buying window.
MongoDB isn't just reaping benefits from the secular trends toward cloud computing and big data processing, which in turn tie into the exploding data collection that makes the Internet of Things so exciting. The company is setting the standards for others to follow. We are looking at a future business software giant in its early years, with a midsized market cap of just $13.4 billion and a huge addressable market.
There is nothing wrong with MongoDB's business right now, even if its recent earnings surprises were too small to impress the Street. You should take advantage of that imbalance and start building a position in MongoDB while the discounted pricing lasts.