What happened
Shares of MongoDB (MDB -0.86%) popped by as much as 23.9% this week, according to data from S&P Global Market Intelligence. The developer data platform, which is trying to disrupt the database market, put up impressive growth in its Q3 earnings report; this caused investors to bid up its shares. As of market close on Friday, Dec. 9, the stock is up 19.7% this week.
So what
After the market closed on Dec. 6, MongoDB reported earnings for the three months ending in October. Revenue grew an impressive 47% year over year to $333.6 million, handily beating analyst expectations of $303.4 million heading into the report. Earnings were also solid, with adjusted earnings per share (EPS) of $0.23 vs. analyst expectations for a loss of $0.17 per share. Beating analyst estimates is the key reason that MongoDB's stock popped so much in the days following its earnings release.
On top of this revenue beat, MongoDB management raised its full-year fiscal 2023 guidance to $1.26 billion, compared to its previous estimate of $1.2 billion.
The company is seeing strong growth from its MongoDB Atlas cloud platform, which grew revenue by 61% year over year in Q3 and now makes up 63% of MongoDB's overall revenue. This segment is important to watch and should drive the majority of growth for the company in the future. With such rapid growth, it's no surprise to see investors optimistic about the stock at the moment.
Now what
MongoDB has a fantastic opportunity to disrupt the multibillion-dollar database market through its cloud-based services. The company has executed strongly on this vision, putting up revenue growth of more than 30% since going public around five years ago -- and that could continue in the future.
Growth is exciting, but there are two things that should make investors pause before putting money into MongoDB shares. First, the company is not profitable, with a negative free cash flow of just under $50 million through the first nine months of this year. It has over $1 billion in cash on its balance sheet, so there are no liquidity concerns, but it will need to achieve profitability eventually.
Second, the valuation is nothing to scoff at. At a market cap of $13.3 billion, shares trade at a forward price-to-sales ratio (P/S) of 10.55 if the company can achieve its full-year revenue target. That is well above the market average. What this means is that if you want to buy shares of MongoDB, you need to be confident the company can grow its revenue at a high rate for many years. Otherwise, you may well lose money owning the stock.
