MongoDB Q1 Earnings Preview: Caution As Investor Optimism Elevated (NASDAQ:MDB)

Introduction & Investment Thesis

MongoDB (NASDAQ:NASDAQ:MDB) is a document-oriented database provider that has underperformed the S&P 500 and Nasdaq 100 year-to-date. The company reported its Q4 FY24 earnings in March, where revenue and earnings grew 31% and 336% year-over-year, respectively, as it continued to see strength in its Atlas offering by adding new workloads given robust product innovation.

The company is set to report Q1 FY25 earnings on May 30. For the full fiscal year it expects revenues to grow at a slower pace of 14% to $1.915B, while non-GAAP operating margins are expected to shrink to 10%. During the last earnings call, management outlined that it won’t be getting the revenue bump from unused Atlas commitments like it did in FY24 due to restructuring of sales incentives and normalization of multi-year deals for its Enterprise Advanced (“EA”) offering, leading to weaker revenue guidance in FY25.

While MongoDB should gain market share in the coming years as it remains focused on its product innovation to drive new workloads, especially as enterprises scale their spending on building and deploying GenAI applications coupled with scaling its sales team to drive more focused account-based go-to-market strategies to penetrate larger enterprises, the stock price has tremendous investor optimism baked into it, especially as it has been exceeding its earnings estimates by 120% on average over the last four quarters.

Given the risk-reward, I believe the stock is not attractively priced at current levels, especially if management fails to exceed expectations. As a result, I will be staying on the sidelines and rating the stock a “hold” at the moment.

A quick primer about MongoDB

MongoDB provides an integrated set of databases that is built on their document-based architecture, combining both relational and non-relational databases. This allows development teams to better manage data and cost-effectively build, deploy, and maintain applications, thus increasing the pace of innovation and time to market within an organization. Their offerings include their managed multi-cloud database-as-a-service (“DBaaS”) MongoDB Atlas platform, while MongoDB Enterprise Advanced is their self-managed offering for enterprise customers that run in the cloud, on-premises, and hybrid environments.

A preview of MongoDB’s Q4 earnings report

MongoDB reported Q4 FY24 earnings in March, where it generated $1.68B in revenue, growing 31% YoY. Out of the $1.68B in revenue, Atlas revenue grew 36% YoY to $1.1B, while EA Revenue grew 18% YoY to $430M. During its Investor Presentation in May, management estimated its total addressable market size to grow at a compounded annual growth rate (“CAGR”) of approximately 13% to $153B by FY28. During the earnings call management also laid out priorities for FY25 to continue to gain market share.

Starting with Atlas, the company continued to see strength with new workload acquisition and stronger consumption trends YoY, coupled with a record pace of product releases that included Vector Search. This simplifies an organization’s ability to use their proprietary data to build GenAI applications. The preview of Atlas Stream Processing, which works with any type of data and thus enables customers to build applications that analyze data in real-time to improve operational efficiencies and drive better engagement for their end-users, also contributed to the strong performance. During the year, the company added 7,000 Atlas customers to a total of 46,300 customers, and management expects stable consumption growth moving into next year, which I believe is a combination of the strength of MongoDB’s product innovation leading to superior competitive advantages and higher win rates, especially as organizations consolidate their spend away from point solutions to integrated platforms to benefit from pricing advantages coupled with an improving macroeconomic landscape.

In terms of profitability, MongoDB generated $270M in non-GAAP operating income, up 336% YoY with a margin of 16%, which marks an improvement of 1100 basis points from the previous year. I believe the improvement in profitability was driven by a combination of the company’s efforts in streamlining operating expenses, which grew 13% YoY at a much slower rate than overall revenue growth, as well as revenue outperformance from superior workload acquisition and retention on the platform.

Looking forward, management expects to generate approximately $1.915B in revenue in FY25, which would mark a growth of 14% YoY, with a non-GAAP operating income of $193M, at a margin of 10%. During the earnings call, Michael Gordon, CFO of MongoDB, outlined the rationale for the soft guidance. In terms of their revenue guidance, the company management discussed that it won’t be getting a revenue bump from unused Atlas commitments as it did in FY24 since they changed their sales incentive structure to reduce the importance of upfront commitments, along with a more normalized number of multi-year deals for EA compared to FY24, which will likely lead to a modest decline in non-Atlas revenue in FY25. In terms of profit guidance, the absence of a FY24-style revenue bump from unused Atlas commitments and multi-year license revenue from EA will squeeze margins YoY, along with the management’s plan to increase their pace of sales hiring.

In terms of management’s priorities for FY25, the company will continue to drive superior product innovation through additional features in their newer products that include Vector Search and Atlas Stream Processing. I believe that as enterprise spending in GenAI shifts towards building and deploying AI applications, MongoDB will benefit by helping their customers create superior end-user experiences. During the earnings call, Dev Ittycheria, CEO of MongoDB, sounded optimistic in terms of the traction of their platform with AI startups that are building applications such as real-time patient diagnostics for personalized medicine, cyber threat data for risk mitigation, auto-generated animations for personalized marketing campaigns, and more. Their second priority includes acquiring new workloads to scale long-term growth in their Atlas offering while incorporating product-led go-to-market strategies to drive deeper adoption across multiple developer teams within existing enterprise accounts. Finally, the management also plans to grow their sales capacity in order to effectively gain market share through a more focused account-based marketing strategy to acquire and deepen adoption among large enterprise accounts.

Key Updates since the last earnings call

During the last three months since the earnings call, MongoDB has been busy with plenty of initiatives on its product innovation, which I will highlight below.

1. During its Investor Day, MongoDB rolled out the general availability of Atlas Stream Processing, which will make it easier for developers to use real-time data from different sources to build event-driven applications, which I believe will allow organizations to drive superior business outcomes and operational efficiencies, thus driving new workloads to Atlas.

2. At the same time, it also announced a preview of its Atlas Edge Server, which would give developers the capability to deploy and operate distributed applications in the cloud and at the edge, which I believe will significantly reduce the complexity, latency, and risk associated with managing applications in edge environments while enabling organizations to make faster real-time business decisions.

3. Simultaneously, MongoDB also announced a collaboration with Google (NASDAQ:GOOG) to optimize Gemini Code Assist from Google Cloud to provide code suggestions, answer questions, and update codebases, which I think is a huge step forward in enhancing developer productivity to accelerate application development and reduce friction in the entire software development and delivery process.

4. Finally, MongoDB also announced its AI Applications Program (“MAAP”), which is designed to provide customers with a strategic framework, professional services, and technology stack to identify business problems that will be solved through genAI applications and put them into production.

Things to look for in MongoDB’s Q1 earnings call

MongoDB is set to report its Q1 FY25 earnings on May 30th, and I believe these are the key metrics and commentary to look for in order to assess the investment thesis for the stock.

1. Revenue guidance: The company is set to report $440M in revenue in Q1, which represents a YoY growth of 19% YoY. While I believe investors will be looking to see whether MongoDB meets and exceeds its Q1 revenue target, I believe there will be a higher emphasis placed on its forward revenue guidance, given the set of its growth priorities for product innovation, acquiring new workloads, and expanding its sales team to drive focused account-based marketing activities for large enterprises. Therefore, it will be important to pay attention to the management’s commentary in the following areas:

• Consumption trends and net new workloads: In Q4, the management had outlined its expectations for Atlas consumption trends to be in line with the consumption growth they experienced in FY24. While the headwinds from unused Atlas commitments coupled with slower Atlas consumption during the holiday season will be the most pronounced in Q1, I believe that any indications from the management where consumption trends improve better than expected from a combination of strengthening macroeconomic conditions, product innovations, and go-to-market strategies bringing in net new workloads on the platform will boost investor optimism and confidence in the company.
• Progress on its strategic account program: Earlier, we saw that MongoDB plans to expand its sales capacity to penetrate deeper into the enterprise landscape to gain market share. As a result, I will be paying close attention to the growth rate in the number of customers spending $100K in Annual Recurring Revenue (“ARR”), which grew 24% YoY in Q4 to 2052 customers. Should there be an acceleration in the number of customers spending $100K or more in ARR, it will be an indication that the company’s strategic account program is working, in which case investor optimism will go up.

2. Profitability guidance: In Q1, the company is expected to generate $23.5M in non-GAAP operating income, which represents a margin of 5.3%. While beating its Q1 profit estimates will be a sign of optimism, as it signals that the company is being able to grow its unit economics by accelerating the addition and adoption of workloads on the platform, I believe we also need to be paying attention as to whether the management holds its FY25 margin target of 10% or raises it higher. Should the company see slower than expected revenue growth and muted success in its strategic account-based program from a combination of macroeconomic and competitive factors, it will put further downward pressure on margins. To elaborate on the competitive landscape, MongoDB faces direct competition from large cloud providers, such as Amazon Web Services (NASDAQ: AMZN), Google Cloud, and Microsoft Azure (NASDAQ:MSFT) where they offer a wide array of relational and non-relational databases while benefiting from size and reach.

Is MongoDB a buy?

Assuming that MongoDB achieves its FY25 target for revenue growth at 14% generating $1.91B, and then returns to growing in the low twenties range (which is slightly more conservative than consensus estimates) until FY27, where we see the company acquiring new workloads leading to a higher ARR per customer on Atlas, with a combination of robust product innovation and a focused account-based go-to-marketing strategy, it should generate approximately $2.75B in revenue.

In terms of profitability, as the company sees improving unit economics from higher workloads and ARR per customer on the platform, it should be able to expand its margins to at least 15–17%, close to its long-term target of 20% that it outlined in its Investor Presentation by streamlining operating expenses and gaining operating leverage. This would mean that it would generate approximately $468M in non-GAAP operating income during this period of time, which represents a CAGR of 55%, much faster than revenue growth.

Assuming that its earnings growth normalizes to grow in line with revenue growth as it approaches the 20% margin target, I believe that MongoDB should trade at approximately three times the multiple of the S&P 500, where its companies grow their earnings on average by 8% over a 10-year period, with a price-to-earnings ratio of 15–18. This would translate to a PE ratio of 50, or a price target of $258.

This represents a downside of 25% from its current levels, which I believe indicates elevated investor optimism given their history of exceeding earnings estimates, especially over the last four quarters, with an average beat of 120% as can be seen below.

Therefore, if MongoDB manages to beat their earnings target and guidance by at least 25%, which is my estimated downside given the fair value of the stock, the stock price may remain anchored or see upside from its current levels. On the other hand, if the management fails to surprise by less than 25% on the upside, I believe we will see a potential price correction from current levels.

Given the risk-reward of the stock and the elevated investor optimism, I will not be initiating a position at current levels and will be waiting on the sidelines for a better entry point to drive long-term upside in my portfolio, making it a “hold” at the moment.

Conclusion

While I am impressed by MongoDB’s product innovation and believe it should continue to gain market share in the coming years given the management’s focused priorities in FY25, I believe that there is elevated investor optimism at the moment, while the management provides clearer guidance on Atlas consumption trends and its progress in its strategic accounts program as it expands its sales capacity. Given the risk-reward, I will remain on the sidelines and rate the stock a “hold” at the moment.