MongoDB defies doubters with strong performance in Q2

Expert in database software MongoDB (MDB 18.34%) reported earnings on Thursday, and the results fell well short of analysts’ expectations. Shares rose more than 18% shortly after the opening bell on Friday.

In most cases, this would be a simple story. Surprising financial strength leads to a triumphant leap in stocks. The end. But it’s trickier for MongoDB, whose big jump hasn’t come close to making up for recent losses.

This awkward situation raises several questions:

• How good were MongoDB’s Q2 results, really?
• Why are stocks trending down in 2024?
• What is the company doing to turn the tide?

Let’s see if they can find answers to these burning questions with the help of MongoDB’s second quarter earnings report and conference call.

MongoDB’s Q2 earnings beat all expectations

Shares are down 15% from a day before the first-quarter report three months ago and are 44% off their 52-week highs in February. As I said, the jump on Friday was not enough to offset the recent price declines.

At first glance, the quarterly report ticked all the boxes for an upbeat financial update. Revenue rose 13% year-over-year to $478 million. Your average financial analyst was expecting about $464 million, according to MongoDB’s guidance. Adjusted earnings per share fell 25% year-over-year to $0.70 per diluted share. That was still well above the analyst consensus of $0.49 per share, which matched the upper end of management’s official guidance range.

to second Look, you should know that MongoDB shares tumbled in May due to low guidance for this second quarter report. CEO Dev Ittycheria explained that the latter half of the year looked challenging due to slower-than-expected sales of the MongoDB Atlas cloud-based database service. So it set the second low bar, resulting in a sharp reduction in the share price.

With that in mind, let’s compare MongoDB’s actual results to analysts’ forecasts three months ago, before the disappointing guidance update. As it turns out, MongoDB smashed those targets too:

Data source: MongoDB earnings report results, analyst targets confirmed by multiple sources.

So MongoDB blew those old targets out of the water too. In other words, management set some overly conservative targets three months ago, took a market beating as a result, and were not fully forgiven for that mistake when the actual numbers came in above all expectations.

MongoDB’s sensible but optimistic strategy

More broadly, investors and analysts worry about MongoDB’s strategic direction.

Despite shrinking gross margins and a challenging sales environment, MongoDB is increasing its operating costs. Q2 sales and marketing budget increased 13% year-over-year, in line with surprisingly strong revenue growth. Research and development (R&D) saw even stronger growth of 19%, resulting in lower profit margins and lower profits.

By the way, this is an adjusted view. MongoDB reported operating expenses of $421.3 million, but that included $123.8 million in stock-based compensation instead of cash pay. On a generally accepted accounting practice (GAAP) basis, the company reported a net loss of $54.5 million, or $0.74 per share.

Stock-based compensation can be an effective strategy in good times, but employees may feel less motivated by those stock awards when stock prices decline.

On that note, I’m happy with MongoDB’s recent compensation moves. The stock-based compensation component actually fell 2% year-over-year, with a 15% decline in sales and marketing. The company is investing real money in the workforce here, an idea that boosts its morale during a period of slower business growth. And the notion of increasing R&D and sales budgets in these trying times is absolutely correct – technology experts are more likely to solve business problems by intensive product development than by cutting costs and expenses.

MongoDB’s Long-Term Outlook in the Booming AI Era

The increased operating budget is paying off. MongoDB Atlas’ stalled sales had a second ringing, with revenue up 27% year-over-year, and management sees brighter days ahead.

Its non-relational database model is a natural fit for the requirements of the artificial intelligence (AI) space, especially where datasets are large and disorganized. You know, like the real world and the messy data people collect from it. As a result, many of MongoDB’s recent contracts are with companies pursuing different types of generative AI.

MongoDB is not a cheap stock, despite its persistent share price decline and strong results this week. The stock trades at 93 times non-GAAP earnings and 11.7 times sales, which is lofty territory even for a high-octane growth stock.

At the same time, I like what I see in MongoDB’s long-term strategy and business opportunity. The company has secured less than 1% of the massive enterprise database market, and I expect it to continue to steal contracts from the industry giant. Oracle for the years to come.

All things considered, MongoDB stock might be worth a closer look if you’re looking for an alternative angle on the generative AI boom.