MongoDB Stock Up 18% In A Day: Return To $500 In Sight?

Could MongoDB stock (NASDAQ:MDB) regain $500 in a year? Not too far-fetched a possibility, given that MongoDB stock was trading at around $500 levels at the end of February – just six months ago. Since then the stock has nosedived by about 42% and trades at close to $283 presently after the company reported slower-than-expected growth in Q1 FY’25 and provided weaker-than-expected guidance.  At the current price level, MongoDB stock trades at about 86x trailing earnings. Is this pricey? Probably not. Especially if you consider the fact that the company’s earnings have the potential to grow by over 2x the current level in the next couple of years.

MongoDB has already done it in the past

To put things in perspective, MDB stock swelled 245% from levels of $145 in November 2022 to around $500 in February 2024, vs. an increase of about 33% for the S&P 500 over this roughly 15-month period. However, historically, it has been a bumpy ride for the stock, with returns for the stock being 47% in 2021, -63% in 2022, and 108% in 2023. The underperformance in MDB’s stock vs. the S&P 500 in 2022 stands out in particular. Notably, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Gen AI Wave Can Drive Revenue Recovery

MongoDB has seen its revenue grow at an annual rate of 42% over the last three years, rising from $590 million in FY’21 to $1.68 billion in FY’24. Growth was driven by the company’s focus on non-relational databases, which offer greater flexibility customization, and greater scalability. The company’s cloud-based Atlas service has also been popular due to its easy integration with various public cloud platforms such as AWS. While the company did see its growth rates moderate a bit in the most recent fiscal year (roughly 30% growth), it’s possible that generative AI could drive the next wave of growth for the company. AI is very data-intensive, and this could translate into higher data volumes for MongoDB platform as its customers deploy AI services.  MDB recently launched the MongoDB AI Applications Program (MAAP) for its customers. The program offers an end-to-end AI technology stack, professional services, and a unified support system that helps customers quickly build and deploy AI applications. Moreover, companies from diverse sectors are adopting AI and looking to leverage AI tech as an input that can help these companies win. Now if MongoDB’s revenues grow at an average annual rate of about 35% for the next 2 years, they could move from around $1.7 billion in FY’24 to around $3.1 billion by FY’26 – or up about 82%.

Can A Higher Mix of Recurring Sales Drive Margins Higher?

Mongo DB’s margins have also been trending higher. The company’s adjusted net income was $274.2 million or $3.33 per share in FY’24, translating into a net margin of about 16%, compared to about 5% in FY’23 and negative levels in FY’21. The company could very well boost margins further, as its revenue base expands and cost absorption improves. Moreover, as the company shifts to more recurring subscription-based revenue, margins can benefit. Considering the recent margin trend, we think it’s possible that adjusted net margins could expand to about 20% by FY’26.

Higher Margins, Recovering Growth Can Power Stock To $500

Now if we combine roughly 80% revenue growth in two years, with a 400 basis point increase in margins, it means that earnings could expand to close to $620 million (about $7.6 per share), up a little over 2.3x compared to FY’24 levels of $274 million ($3.30 per share). Now if earnings grow 2.3x, the PE multiple will shrink by 2.3x times, assuming the stock price stays the same! But that’s exactly what MongoDB investors are betting will not happen. If earnings expand by over 2-fold over the next two years, instead of PE shrinking from a figure of around 86x now to about 43x, a scenario where the PE metric stays at about 60x to 65x looks quite likely as investors potentially reward the company for better than expected momentum. This would make a return of the stock price to levels of about $495 a real possibility. What about the time horizon for this high-return scenario? In practice, it won’t make much difference whether it takes 3 years or 5, as long as MDB is on this revenue expansion trajectory, with margins holding up, the stock price could respond similarly. 

But it could be a bumpy ride yet again. While there is definitely a case to be made for large long-term gains from MDB stock, the Trefis High Quality (HQ) Portfolio could be right up your alley if consistent outperformance is at the top of your list.

[1] Returns as of 9/02/2024
[2] Cumulative total returns since the end of 2016

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