MongoDB directly benefits from the AI boom

The market may have soared this year but this doesn't mean the macro challenges have ended. Companies are still prioritizing probability over growth as the high interest rates are making it very costly to grow by burning cash.

Companies are trying to be as efficient as possible to reduce their need for external financing in the current tight monetary environment. Even though we're in the year of efficiency, some companies continue to grow rapidly, meaning that their products and services are still in high demand, and database company MongoDB ($MDB) is one of them.

MDB stock skyrocketed over 30% in early June after the quarterly results and guidance blew past expectations. For investors, that was a clear sign that MongoDB remains a priority for companies even amid the tight financial environment.

MongoDB is now trading at 52-week highs as the stock has more than doubled this year. If the current financial performance continues, which is very likely as we'll see, the stock has little downside risk even from current levels. MDB is a direct beneficiary of the AI revolution that can accelerate its growth in the coming years, making its stock attractive even at current prices. Let's take a deeper look.

The Platform That Digital Companies Need To Succeed

The relational database has been around for almost 45 years. It's a legacy database that worked well for simple applications but it doesn't suit the needs of modern applications. It's inflexible, requires a lot of structure, a certain level of planning, and is difficult to handle across multiple servers. As applications get more and more sophisticated and have more performance requirements, companies need a new type of database.

MongoDB offers the most popular non-relational database, which is essentially the type of database that companies need to build modern, dynamic, cloud applications. The company operates in one of the fastest-growing markets in the tech industry. As you can see below, the data management software market is expected to grow to $136 billion by 2027, or 68%. And this projection doesn't take into account the growth of AI, which will only accelerate the increase in data usage.

In other words, MongoDB operates in a high-growth market and is the leader in its space, which is a combination that can lead to market-beating returns. As a database company, MongoDB will directly benefit from the growth of AI because of its consumption-based business model. The company makes money based on the data storage its customers need. AI will help companies dramatically improve their software development capabilities and rapidly launch many more applications. The acceleration in application development will lead to a rapidly increasing demand for data storage, and hence rapidly increasing demand for MongoDB, the most popular modern DB platform.

While ChatGPT was launched just a few months ago, MDB has already started to see a spike in demand for its platform from AI companies. In Q1, over 200 customers running AI apps started using the platform to manage their data and applications. And this is just the beginning as companies are rushing to integrate AI into their application to deliver a better customer experience and boost their efficiency. MongoDB will benefit from this trend as companies will need to store and manage their massive amounts of data from a modern platform designed for modern, cloud-based applications.

Stellar Top & Bottom Line Performance

On June 2, MDB stock saw the biggest move in years thanks to earnings and guidance that blew past expectations, suggesting continued strong growth and improved efficiency. In Q1, revenue grew 29% y/y to $368 million, beating estimates by more than $21 million, which is a nice beat. Even better, the Q2 outlook for revenue of around $390 million, beat analyst estimates by $30 million. As you can see, MongoDB is growing by leaps and bounds, even in the current environment. This is because the company's in the right place at the right time thanks to the accelerating demand for software applications.

Q1 growth was driven both by new customer additions and the increasing spending of existing customers. The company ended the quarter with 43,100 customers, up 22.4% y/y, which is a strong growth clip. MDB already has a sizeable customer base but continues to grow rapidly, which confirms the large addressable market. Also, the other growth driver was the increase in spending from existing customers and MongoDB overdelivered once again as the Net Retention Rate (NRR) came in at 120% during the quarter.

MongoDB is actually growing much faster than the headline number suggests. Revenue from its cloud database, Atlas, jumped 40% y/y in Q1, representing 65% of the total revenue, up from 60% in the year-ago quarter. Atlas allows companies to build and scale fast as the underlying infrastructure is managed by MongoDB. Atlas revenue will only increase as a % of the total revenue given the high growth. The company makes the other 35% of its revenue from services to enterprises that use its database on-premise.

MongoDB management team has made it clear that it will continue to invest in growth to capture market share due to the large growth opportunity. As we saw above, they've been very successful in that as the growth has exceeded expectations. At the same time, they're becoming more efficient and improving their margins both on an adjusted and non-adjusted basis. In Q1, the non-adjusted operating margin improved to -19.3% from -27.7% a year ago and if we exclude stock-based comp of $104 million the adjusted income margin came in at 12%, from 6% in Q1 of last year. The operating efficiency was driven by the disciplined increase in spending across all operating expenses. Most importantly, sales and marketing expenses increased by 22% y/y, slower than the revenue growth over the same period, which is a sign of strong demand even in the current environment.

On top of that, MongoDB delivered its highest operating cash flow (OCF) ever in Q1, in another sign of healthy scaling operations. It made nearly $54 million in cash from operations during the quarter, up from just $11.6 million a year ago, and the main contributor was the revenue outperformance due to the higher-than-expected demand.

What About Valuation

MongoDB's PS ratio plunged to the low single digits in late 2022, which didn't make sense given its continued rapid growth and operating improvements. But this year the stock has more than doubled and it's certainly no longer a bargain. At current prices of around $410 per share, it trades at a PS ratio of 21x, making it one of the most expensive names in the software industry. While the recent surge has made it less attractive in the near term, the AI craze and the stellar results can help MDB rise even higher. Assuming the PS ratio stays at current levels, MDB stock can rise 11% from current prices to $455 by the end of its fiscal year.

What Else

MongoDB is the ExxonMobil ($XOM) equivalent of the digital age. Data is the new oil and while MDB doesn’t produce data, it powers the data-driven economy. It's the most popular modern DB platform that developers use to build next-gen applications. The rapid growth and stellar guidance suggest that companies can't afford to deprioritize their investments in innovation, helping MongoDB deliver impressive results amid a challenging economic backdrop. The stock is not cheap but unless we see another market-wide tech selloff it’s unlikely that the stock will fall sharply from current levels.

MONGODB RATING

Short Term: Buy‌‌Long Term: Buy

🎯 5-Month Price Target: $284 ➡️ $455

I've no positions in the stocks mentioned.

The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions.