MDB - MongoDB: The 2-Step Rule For Attractive Returns

2023-08-01 12:54:20 ET

Summary

• MongoDB, Inc. shows strong growth and profitability prospects until the end of its fiscal year.
• The company competes for workloads, not binary customer spending, which sets it apart from other software companies.
• The current earnings season reflects a robust appetite for IT investments, provided there are clear returns on investment.
• Following the 2-Step Rule, investors should aim to enter before the stock fully takes off and look for two consecutive positive earnings results to gain sell-side support.

Investment Thesis

MongoDB, Inc. ( MDB ) has strong prospects and is expected to deliver both compelling growth rates and attractive profitability into the end of its fiscal year. Note, MongoDB is about to report fiscal Q2 2024 at the end of August, not to be confused with calendar 2023.

On the basis of what I refer to as the "2-Step Rule," I present my bullish appraisal of MongoDB and explain why I believe MongoDB has what it takes to deliver a rewarding upside potential.

Insights From This Earnings Season

In my previous bullish analysis , I provided this context, which I believe is helpful,

MongoDB is an open-source, NoSQL (non-relational) database management system. This means that rather than digesting "rigid" data, it's able to search through "always on" data.

The example I often give is this: Think of digesting data from Twitter. Data is being input at all times. Sometimes as a picture and sometimes as text. The question is how to structure this data? Or data from an e-commerce company's inventory, that's being added to and removed at all times via cloud orders?

What makes MongoDB's prospects different from many other software companies is that it does not participate in a sector with all-or-nothing customer spending dynamics. Here's a quote from MongoDB's business update that best explains its fundamentals,

Our competition is not binary like that. We're competing for workloads. As I mentioned, every application has its own database. And the result of that is that our unit of competition itself is the workload. And so you've heard us talk about the sort of land and expand model that we have.

What this means is winning an initial workload, yes, hopefully that workload is successful, but the way and grows, but the way that we really grow within the account is winning additional workloads.

Along these lines, in the graphic that follows you see an illustration of what's described above.

We can see above how MongoDB is able to gather more wallet share from customer accounts over time. That getting a customer on board is just the start of their journey with MongoDB.

Moving on, we are now about halfway through the earnings season, with MongoDB together with some of its SaaS peers reporting much later in the earnings season.

The big takeaway from this earnings season has been that there's still, surprisingly, tremendous appetite for investing in IT, even now at this stage post-pandemic, provided that the software the companies provide is able to deliver clear and easily measurable returns on investment.

Meaning that, on the one hand, there is a more restrictive spending macro environment than we navigated through in the past couple of years.

But on the other hand, companies are still out there willing to spend to get ahead. Altogether, there's simply more scrutiny amongst the C-suit, before embracing ''yet another software package.''

Follow The 2-Step Rule

The 2-Step Rule is what I've termed a method to invest for satisfactory returns. I've attempted to boil down the 2-Step Rule as much as possible, to make it easy to follow and highly actionable:

• Step 1) You want to get in when analysts are busy pumping your stock but before the stock has fully taken off.
• Step 2) You need at least two back-to-back highly positive earnings results. And it's not a lot more complicated than this.

This is how it works. Last quarter, MongoDB delivered a very positive earnings result. This led to analysts upwards revising their revenue targets for MongoDB, see the red arrow below.

Then, if MongoDB gets a second strong earnings report, back-to-back with the last one, then the Street will be very busy pumping your stock. Why?

Because the sell-side will have gone from chirping about Mongo's strong execution to bellowing on a bullhorn about MongoDB's strong prospects and outlooks. And that's what you want as an investor. You want the sell-side on your side, but you need to get in before the stock fully takes off.

Allow me to provide further context. What you see above is that MongoDB's fiscal 2024 presently points toward a 20% CAGR. But as you know, H1 2024 is already in the bag, and if H1 2024 ends up delivering about 30% CAGR, it's extremely unlikely that the second half of fiscal 2024 ends up delivering around mid-10s% CAGR.

After all, the comparables with H1 2023 are much easier, starting with Q3 2024, which has already started in August. Indeed, by the time MongoDB gets around to reporting its fiscal Q2 2024 results, MongoDB will have already progressed nearly a full month through its fiscal Q3 2024.

The Bottom Line

As an investor, I am optimistic about MongoDB, Inc.'s prospects and anticipate significant growth and profitability into the end of its fiscal year.

MongoDB's open-source, NoSQL database management system positions it uniquely, as it competes for workloads rather than relying on binary customer spending dynamics.

Following the 2-Step Rule, I aim to invest when analysts are pumping the stock but before it fully takes off, and I'm looking for two back-to-back positive earnings results.

With MongoDB, Inc.'s strong execution and promising outlooks, I expect the sell-side to wholeheartedly endorse this stock, and I am confident in its potential to deliver upside to investors.

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