Shares of MongoDB (NASDAQ: MDB) fell hard in Q2 for one reason and one reason alone- the guidance. Unlike other AI winners, the company’s guidance is for growth but tepid, anemic growth compared to the whisper expectations. The guidance resulted in a 50% decline for the stock from peak to bottom, assuming a bottom is in play, and 40% for the year, providing a deep discount for investors. The question is if it's time to buy the dip, and the answer may be yes.
The problem for MongoDB stock prices today is the timeline for AI development. The timeline includes a push to generate new AI-powered software and apps, which will come later. Today, the focus is on NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD) GPUs and accelerators needed for the infrastructure. The software and apps will come once the infrastructure is built and the models trained. Or so goes the theory.
Analysts' Conviction is High for MDB Stock
The analysts remain steady in their support for MongoDB despite the weaker-than-expected outlook. The news resulted in some price target reductions, but the takeaway is that this stock is a Moderate Buy with a 45% upside. The consensus is down from a peak set in the first half but still up compared to last year, and the stock is trading below the lowest target, suggesting real value is present.
Analysts' chatter following the Q1 release was favorable despite the declining targets. The takeaway is that weakened IT spending in the first half impacted the results, but the long-term outlook is much brighter. Like the proliferation of software companies that blossomed along with the Internet, AI is expected to drive a similar wave of software needs that MongoDB is positioned to facilitate. Its Atlas cloud database system, which uses and provides AI assistance, is easy to use; the free tier leads to paid clients and scales with business.
The latest update comes from Citigroup, which says it buys the dip. The firm is optimistic, putting MongoDB at the top of its list of enterprise software firms. While seasonal headwinds are hurting the outlook now, an inflection is coming for the stock that will include increased enterprise IT spending, lower interest rates, and seasonal estimate revisions. No price target was given.
Institutions are Buying the Dip in MongoDB: Short Covering May Start Soon
Analysts are not the only ones buying the dip in MongoDB. Institutional activity has slacked off from its peak in Q1 but remains bullish on balance in Q2. Institutional activity has been bullish on balance for three consecutive quarters and five of the last six quarters, bringing total ownership to nearly 90%. The May and June activity is exciting because it includes numerous triple-digit position increases, including a 400% increase for Plato Investment Management, a 300% increase for Cetera Investment Advisors, and a 200% increase for Western Pacific Wealth Management.
Short interest is also in play with this stock. The 6% short interest reported in mid-June isn’t enough to fuel a squeeze, but short-covering could aid upward momentum. As it is, the market is showing signs of a bottom that could lead to a rebound later this year. The bottom is near $245 and aligns with previous support seen in 2022 and a congestion band in 2023 that reveals intense market activity. Assuming the market sustains support at this level, a rebound could form soon.
Among the long-term drivers for the stock price is the business quality. The company is still generating GAAP losses but is profitable on an adjusted basis. It generates free cash flow, and free cash flow is growing. Highlights from the Q1 report include increased cash, no long-term debt, reduced liabilities, and a 20% increase in shareholder equity.
