Here’s why MongoDB stock gained 15% last month

Actions of MongoDB (MDB 1.67%) rose 15.2 percent in August, according to data from S&P Global Market Intelligence. The company extended its streak of beating quarterly earnings estimates, and its forward-looking comments impressed investors looking for signs of growth and profitability.

MongoDB smashed quarterly earnings expectations

MongoDB reported earnings on August 29, and investors were impressed. The company posted a 13% increase in revenue, driven by subscription sales. Its top-line and bottom-line results were comfortably higher than Wall Street forecasts, and investors were also pleased to see the company raise its full-year guidance.

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The bottom line results were even more impressive than the sales figures. The $50 million expansion in revenue over the previous year allowed the company to reduce its burn rate. MongoDB’s free cash flow was $4 million last quarter, down from $27 million a year earlier. The company has a positive cash flow to date, which is an important aspect.

Reviewing the P&L suggests that MongoDB isn’t profitable yet, but that doesn’t mean it’s burning cash on its balance sheet. The company has about $2 billion in short-term liquid assets on its balance sheet, so the ability to operate without burning cash is an important step.

MongoDB has now significantly beaten Wall Street expectations for several consecutive quarters. The latest quarterly update prompted many analysts to upgrade their earnings forecasts for the next two years, most of them higher. When the consensus outlook improves, it tends to push stocks higher, and that force was at work here last month.

The valuation is more reasonable, but it is still an issue for investors to consider

Even with August’s strong performance, MongoDB shares are down 25% over the past year. The company’s rate of expansion has slowed, prompting investors to keep a close eye on its valuation.

The stock’s price-to-sales (P/S) ratio has fallen 35% to 11.4 over the past 12 months, while its forward P/E ratio has fallen 10% to 117. These are still somewhat aggressive valuations, but a some of the risk had been removed — the stock price fell as the company expanded and moved toward breakeven. It is now cheaper relative to the actual financial performance of the underlying business, which is good for new buyers.

MDB PE Ratio data (before) by YCharts

It is difficult to apply standard valuation techniques to high-growth companies that are just turning a profit. Once the company reports positive net earnings, its profit growth rate will be exceptionally high as it expands from a small number.

However, with an earnings growth rate below 20% and a P/S ratio above 10, it’s fair to conclude that the stock still has speculative buyers. Long-term investors can justify a buy at this price, but should be prepared for volatility at this valuation.