Is It Too Late to Buy MongoDB Stock?

MongoDB's (MDB 4.83%) stock has rallied nearly 70% so far this year as the software company impressed investors with its robust growth in a tough macro environment. But even after that run, it remains about 40% below its all-time high set in November 2021.

Should investors still buy MongoDB today, or will it run out of steam again before it revisits its record highs? Let's review its business model, growth rates, and valuation to decide.

Image source: Getty Images.

What does MongoDB do?

MongoDB's namesake product is a database management system that allows organizations to store large amounts of unstructured data more efficiently. Doing so makes it easier for a company to scale up its operations.

MongoDB serves a wide range of small to medium-sized businesses, as well as large enterprise customers across the tech, finance, retail, and healthcare sectors. Its cloud-based service, MongoDB Atlas, locks in those customers with sticky subscriptions. It can be easily integrated into leading cloud infrastructure platforms like Amazon  Web Services (AWS), Microsoft Azure, and Alphabet's Google Cloud Platform (GCP) -- but all three of those platforms also provide their own competing first-party database services.

MongoDB generated 96% of its revenue from subscriptions in the first half of fiscal 2024 (which started this February), while its services provided the remaining 4%. MongoDB Atlas accounted for 63% of its top line in the second quarter.

How fast is MongoDB growing?

MongoDB went public in October 2017. Between fiscal 2018 and fiscal 2023, its revenue increased at a compound annual growth rate (CAGR) of 53%, its adjusted gross margin expanded from 73% to 75%, and its adjusted operating margin improved from negative 49% to positive 5%.

Like many other software companies, MongoDB experienced a slowdown over the past year as macro headwinds drove many companies to scrutinize their spending. Yet its adjusted gross and operating margins continued to expand, and its revenue growth actually accelerated again in the second quarter of fiscal 2024.

Data source: MongoDB. YOY = year over year.

It attributed that acceleration to higher-than-expected consumption rates on MongoDB Atlas, which offset its slower growth in non-Atlas revenue. Its gross margin was boosted by a temporary influx of higher-margin licensing revenue, while its improving economies of scale, slower hiring, and other cost-cutting measures boosted its operating margin.

Does MongoDB's stock still have room to run?

For the full year, MongoDB expects its revenue to rise 24%-25%, which would represent a significant slowdown from its 47% growth in fiscal 2023. However, it sees its adjusted operating margin more than doubling to a midpoint of positive 12%, and it projects adjusted earnings per share (EPS) will surge 180%-190%.

Looking further ahead, MongoDB expects the ongoing expansion of Atlas into the automotive and manufacturing industries to drive its long-term growth. It also believes the burgeoning artificial intelligence (AI) market will generate tailwinds for its business as its clients accumulate more data for AI services.

But MongoDB still isn't profitable on a generally accepted accounting principles (GAAP) basis, mainly due to the stock-based compensation expenses that consumed 27% of its revenue in the first half of fiscal 2024. It also has a high debt-to-equity ratio of 2.0. That red ink and high leverage could limit its near-term gains as long as interest rates stay high.

Finally, MongoDB's stock isn't cheap at 185 times forward earnings and 15 times this year's sales. By comparison, the cloud-based customer relationship management (CRM) and marketing software provider HubSpot -- which is expected to generate 23% revenue growth and 90% earnings growth this year -- trades at 75 times forward earnings and 11 times this year's sales.

Is it too late to buy MongoDB's stock?

MongoDB was undervalued relative to its growth at the beginning of the year, but I believe it's now fairly valued. It's not too late to buy MongoDB's stock as a long-term investment, but I'd only nibble at these frothy levels.