MDB - MongoDB's High Stakes: Unpacking Upcoming Fiscal Q3 2024

2023-11-20 03:10:09 ET

Summary

• MongoDB faces high stakes in its upcoming fiscal Q3 2024 report.
• Investor skepticism looms over MDB's cloud migration narrative.
• The Company balances high quality with a steep valuation - fiscal 2025 prospects under scrutiny.

Investment Thesis

MongoDB ( MDB ) is a few weeks away from reporting its fiscal Q3 2024 results.

Here I make the case that a lot is riding on its fiscal Q3 2024 report. MongoDB needs to convincingly articulate that although it's slowing down its growth the strategic optimization of its go-to-market approach, together with a focus on winning new workloads can allow MongoDB's fiscal 2025 to return to 30% CAGR.

Because even though I'm bullish on this high-quality company, the fact remains that MongoDB's stock is not cheap at more than 160x forward EPS.

Quick Recap

On the back of MongoDB's Q2 results, I penned a bullish analysis where I said:

Despite MongoDB, Inc.'s impressive financial report, I must admit to feeling uncertain and doubtful about the future. While the company delivered exceptional results in Q2, questions linger in my mind.

MongoDB's multiple doesn't reflect a bargain, and the market had already set high expectations. The growth narrative focused on MongoDB's cloud business, Atlas, but Q2's success was driven more by the legacy business.

Since I put forth the assertion that this stock was fully valued, over the following 3 months, we can see how the stock has performed.

The stock has gone nowhere. This a reminder that investors want more than just an alluring narrative and that valuation still matters.

Recent Developments

A lot of companies in IT infrastructure have recently reported and the picture is mixed. This is what I find investors are rewarding, profitable growth.

Investors recognize that there's a challenging macro environment marked by a slowdown in IT departments when it comes to software consumption. The way that CEOs have described this period is one of software digestion, where the bulk of companies that wanted to move to the cloud have already done so.

And although there's likely to be a continued trend towards cloud migration, the pace of this cloud migration has moderated. I've discussed this at length here .

Indeed, recall, this line of reasoning aligns with what MongoDB has already reported in its cloud Atlas business last quarter. And I'm now starting to believe that that was not a one-off event, but instead the new normal for cloud companies.

For a long time, investors salivated on the back of cloud adoption narratives, not paying enough attention to the fact that this was simply companies cannibalizing their customer base.

Consequently, I believe that when MongoDB reports its fiscal Q3 2024 results in a few weeks were are likely to see MongoDB describing how customers are not proactively reducing their spend but rather experiencing a slower pace in underlying application growth.

MongoDB Needs to Convince Investors Of Fiscal 2025 Return to Growth

Before we go further, note that MongoDB is about to report its fiscal Q3 20234 results, not to be confused with calendar 2023. Accordingly, I believe that investors have already come to terms with the fact that fiscal H2 2024 will be challenging for MongoDB.

But starting fiscal H1 2025, as its comparables ease up, I believe that MongoDB could once again return to growing at 30% CAGR.

And if that's the case, this stock would continue to be perceived by investors as a high-growth story, deserving of a high-growth multiple.

MDB Stock Valuation - Very Expensive

MongoDB has nearly always traded at a very high multiple. But for a long time, it could be counted on for more than 30% CAGR, without any need for concern.

But now, the environment has changed. And there's a likelihood that if MongoDB doesn't meaningfully upgrade its fiscal Q4 2024 revenue guidance, investors will start to presume that this company is about to go ex-growth.

And if that happens, all of a sudden, investors will turn their focus to MongoDB's bottom-line profitability and valuation. And I don't know if investors will truly be eager to support paying more than 160x forward EPS for a company that could be growing at less than 30% CAGR.

The Bottom Line

MongoDB stands as a high-quality company with a compelling growth narrative, underscored by strategic optimizations in its go-to-market approach.

The upcoming fiscal Q3 2024 results are pivotal in communicating the company's ability to navigate a shifting macro environment and return to a 30% CAGR in fiscal 2025.

However, despite my bullish stance on the company's prospects, it's crucial to acknowledge the hefty valuation, with the stock trading at more than 160x forward EPS. This valuation raises concerns, emphasizing the need for MongoDB to deliver robust performance and provide convincing guidance in order to sustain investor confidence amid potential challenges to its growth trajectory

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