Should You Buy MongoDB Stock?

MongoDB (NASDAQ: MDB), a leading database management company, recently announced impressive Q1 results that significantly exceeded analyst expectations. The company reported adjusted earnings of $1.00 per share on sales of $549 million, comfortably surpassing consensus estimates of $0.66 per share and $528 million, respectively. This strong performance led to a 14% surge in MDB stock during after-hours trading. Now, investors seeking consistent returns might consider exploring diversified investment options like the Trefis High Quality portfolio, which has demonstrated impressive performance, generating over 91% returns since its inception. Separately, see – What’s Happening With Rigetti Computing Stock?

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Valuation Perspective

Given MDB’s recent stock surge and inherent volatility, you might be wondering if it’s still a good investment. Despite trading at premium valuations, we believe MongoDB may still have room for growth. At approximately $230 per share, the stock trades at 8.8x trailing revenues and 55x trailing adjusted earnings. While these multiples appear high, they are notably lower than its three-year average price-to-sales (P/S) ratio of 12.2x and price-to-earnings (P/E) ratio of 143x.

MongoDB commands these high valuation multiples due to its impressive financial performance and strong market position. The company has consistently grown its revenues at an average annual rate of over 30% in the last three years. Although it currently reports GAAP losses, its adjusted net income margin of 16% is robust. The adjusted net income excludes non-cash items like stock-based compensation and one-time expenses such as acquisition-related costs. Furthermore, MongoDB maintains a healthy balance sheet, with debt at a mere 0.2% of equity and a high cash-to-total-assets ratio of 68%.

Q1 Highlights and Growth Drivers

MongoDB’s Q1 performance demonstrated solid growth across key metrics. Overall sales increased by 22% year-over-year, driven primarily by a 26% growth in Atlas revenues, reaching approximately $395 million. The company also saw substantial improvements in margins, with its reported operating margin improving from -22% in the prior-year quarter to -10% in Q1. Similarly, the adjusted operating margin surged by 900 basis points to 16% over the same period. Consequently, MongoDB’s bottom line saw a significant boost, with adjusted earnings of $1.00 per share, marking a 96% increase from $0.51 in the previous year’s quarter.

Looking ahead, MongoDB projects Q2 revenue to be in the range of $548 million to $553 million and adjusted earnings per share between $0.62 and $0.66. These forecasts are optimistic, exceeding consensus estimates of $549.3 million in revenue and $0.58 in adjusted EPS.

Strategic Positioning in the AI Landscape

MongoDB is strategically positioned to capitalize on the artificial intelligence boom through its Atlas Vector Search capabilities. This has established the company as a recognized vector database for AI applications. MongoDB has actively expanded its AI Applications Program through new integrations with leading AI and technology companies. Additionally, the introduction of cost-reducing vector quantization features, which maintain performance, is expected to further drive MongoDB’s growth in the evolving AI landscape. On a separate note, check out – Why Is Solana Underperforming?

Risks to Consider

While MDB stock’s valuation appears rich but justifiable, investors should carefully consider potential risks. MongoDB has historically demonstrated higher susceptibility to economic downturns compared to the broader market. For instance, during the 2022 inflation shock, the stock plummeted by 76% from its peak, significantly underperforming the S&P 500’s 25% decline. Similarly, during the 2020 COVID-19 pandemic correction, MDB fell by 45% compared to a 34% decline for the S&P 500. This pattern suggests that MDB stock is more vulnerable to adverse macroeconomic conditions. See – Buy or Sell MDB Stock – for more details.

Furthermore, concerns exist regarding a potential slowdown in sales growth. Consensus estimates project the company’s overall sales to grow at a mid-teens average rate over the next couple of years, a notable deceleration from its impressive 30% average growth rate over the past three years. Therefore, while MongoDB stock may remain appealing, investors should carefully weigh these risks against its strong growth prospects and strategic positioning.

You may want to buy MDB after an upbeat Q1 but investing in a single stock, no matter how promising, is risky. If you want to diversify that risk while exposing yourself to strong upside, consider the High Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since inception. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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