In a new era of generative AI, businesses are looking to unleash the power of their proprietary data to create new apps to supercharge productivity. These new AI-powered apps require a flexible approach to managing data, though, one that can use new information to quickly adapt their development.
Enter MongoDB (MDB 4.83%), which offers popular database management software tools that could become even more important in the generative AI epoch that's emerging. MongoDB has reported lots of new customers choosing to build atop its software platform, and it reported stellar growth last quarter. Does that make the stock a buy?
Great performance despite the competition
MongoDB's database tools store records in a type of document versus as traditional rows and columns. Its scalability and flexibility have won over lots of developers. As a result, the company reported having over 45,000 business customers at the end of July 2023, landing 1,900 new ones in the last quarter alone.
The result has been an exceptional growth investment since the company's IPO in 2017 -- including a 40% year-over-year revenue increase in the second quarter of fiscal 2024 (the three months ended July 2023) to $424 million.
Data by YCharts.
As companies start to put generative AI to work in their applications via content creation, software development automation, customer digital experience via chatbots, etc., MongoDB thinks its database management platform will only be more compelling. The recent financial numbers certainly are indicative of this being the case. However, bear in mind the outlook for the third quarter implies revenue will grow at a far more modest 20% to 21% rate due to a few large deals landing in Q2 and temporarily lifting the growth rate higher.
A top AI platform better than Snowflake?
Historically, MongoDB and its software developer-centric software operate a very different type of toolset than another investor favorite, Snowflake (SNOW 3.69%), which offers data storage and compute services geared toward data science and analytics. Of course, there are similarities in the business model.
For example, both MongoDB and Snowflake charge customers on a consumption (or usage) basis rather than as a subscription software-as-a-service model. Tech researcher Gartner (NYSE: IT) also places both companies in the same category of "database management systems," competing against tech giants like Amazon (NASDAQ: AMZN) AWS, Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) Google Cloud, and Oracle (NYSE: ORCL) Cloud and their own cloud-based database software, as well as fellow smaller software pure-plays like Databricks.
Again, it's worth noting MongoDB's fast-and-resilient growth amid a crowded field of competitors that are increasingly stepping on each other's toes. However, as these software companies increase the breadth and depth of their software toolboxes to address needs from AI-powered applications, new customers and customer workloads could get harder to come by. In the meantime, MongoDB isn't as far along in generating the same level of robust profitability as Snowflake (as measured by free cash flow).
Data by YCharts.
That being said, I still don't think Snowflake is a wonderful purchase right now, either. I see it as a possible dollar-cost-average candidate, and MongoDB looks like the same category of stock to me as well. Much like other enterprise software companies, 2023 has been tough as customers pull back on spending to try and conserve cash and retool for emerging plans in AI. And the valuation is still high, at nearly 19 times trailing-12-month sales. With sales expansion moderating, it would be nice to see this key software provider turn the corner on more robust free cash flow profit margins.
For now, I think MongoDB and its transformation into an AI application-building platform is worth keeping a close eye on, but it isn't a buy in my book. If growth starts to accelerate again next year, though, things could get really interesting. Stay tuned.
