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Current Weakness in MongoDB Just Makes MDB Stock a Better Buy

Luke Lango

Shares of high flying technology stock MongoDB (NASDAQ:MDB) traded lower in early June after the company reported strong first quarter numbers, but delivered sub-par second quarter and fiscal 2020 profit guides. Because MDB stock was so richly valued heading into the print, the stock naturally dropped in response to the slightly disappointing guides.

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This reset is perfectly normal, healthy and nothing to worry about in the big picture. In that big picture, MDB stock will continue to fly high because MongoDB finds itself supported by exceptionally favorable growth fundamentals, which ultimately pave the path for this company to one day be really big, really profitable, and really valuable.

Thus, for long term investors, near term weakness in MDB stock should be consistently viewed as a buying opportunity, so long as the growth rates remain big, the margins remain high, the valuation remains reasonable, and the macro backdrop remains favorable.

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Right now, all three of those boxes are checked off for MDB. Consequently, current weakness in the stock should be perceived as a buying opportunity.

MongoDB Is Oozing with Long Term Growth Potential

The story at MongoDB is pretty easy to understand, and it is one that lends itself to tremendous long term growth potential.

At the heart of every software application is a database. That database is used to store, organize, and process data. Traditionally, these databases were relational, meaning they were row-based. That’s because traditional data was almost always structured in a row-column manner.

But, modern data isn’t always structured as such. In fact, because we can now generate data through various channels, modern data is increasingly document-based and much more free-flowing. Enterprises need to store, organize, and process this document-based data, too. But, relational databases can’t do that efficiently. As such, there’s been a boom in the adoption of non-relational databases to handle this new data form.

MongoDB is one of these non-relational databases, but it’s different in one important way: It’s a hybrid database that combines the best aspects of non-relational and relational databases so that enterprises can handle all data formats.

This solution has been a huge hit. MongoDB has consistently grown revenues and customers at a 50%-plus rate over the past several years, with growth actually accelerating over the past several quarters thanks to more and more businesses understanding the benefit of a hybrid database solution.

The potential here is that MongoDB has just 14,200 customers. There are nearly 6 million employer businesses in the U.S. alone. Further, the company projects to do just $380 million in sales this year. The global software database market is closing in on $60 billion.

Broadly, then, MongoDB is a hyper-growth tech company, with a winning solution, that is rapidly gaining share in a big market, and which has a very long runway for future growth. That is a winning combination for MDB stock.

The Growth Boxes Are Checked Off

When it comes to long term winners like MDB, you want to buy them on weakness so long as all the growth boxes are checked off. Those growth boxes include:

1) still healthy revenue growth,

2) stable margins,

3) reasonable valuation

4) favorable backdrop

The Q1 report confirmed that MongoDB stock does check off all those boxes.

Revenue rose 78% in the quarter, which is substantially above the company’s multi-year revenue growth trend. Revenue growth is projected to remain very big for the foreseeable future, too. Customer growth trends likewise remain healthy. Total customers were up more than 100% in the quarter.

Gross margins are taking a step back. But, that’s because of some new business integration issues which will pass by the end of the year. Meanwhile, operating margins are substantially improving as robust revenue growth is driving equally robust opex leverage.

The valuation is rich. But, assuming this company can grow revenues at a 20%-plus rate over the next decade, maintain 70% gross margins, and drive the opex rate down to 30%, MongoDB could easily be looking at $10-plus in EPS by 2030. A big growth average 30-forward multiple on that implies a 2029 price target for MDB stock of $300 or more. So, long term upside remains compelling.

Lastly, the backdrop is still favorable. This company has minimal trade exposure because it’s a services business. An economic slowdown does pose a threat, but the secular pivot towards hybrid databases is likely strong enough to offset such weakness. Meanwhile, new data is increasingly not in a row-column format. Companies are also increasingly adopting data-driven growth strategies. Thus, the need for an enterprise to adopt hybrid databases is only growing.

All in all, the current trends here remain favorable.

Bottom Line on MDB Stock

MDB stock is a long term winner that continues to be supported by favorable growth trends. So long as that remains true and the valuation remains reasonable in the big picture then MDB should remain on a medium to long term uptrend. Against the backdrop of that medium to long term uptrend, near term weakness is a buying opportunity.

As of this writing, Luke Lango was long MDB.

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