What a fantastic six months it’s been for MongoDB. Shares of the company have skyrocketed 117%, hitting $320.00. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Following the strength, is MDB a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free for active Edge members.

Why Does MDB Stock Spark Debate?

Named after "humongous database," reflecting its ability to handle massive data loads, MongoDB (NASDAQ: MDB) provides a flexible document-based database platform that helps developers build, deploy, and maintain modern applications more efficiently.

Two Positive Attributes:

1. Skyrocketing Revenue Shows Strong Momentum

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, MongoDB’s sales grew at an excellent 34.6% compounded annual growth rate over the last five years. Its growth beat the average software company and shows its offerings resonate with customers.

2. ARR Surges as Recurring Revenue Flows In

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

MongoDB’s ARR punched in at $1.72 billion in Q2, and over the last four quarters, its year-on-year growth averaged 25.2%. This performance was fantastic and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes MongoDB a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

One Reason to be Careful:

Operating Losses Sound the Alarms

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

MongoDB’s expensive cost structure has contributed to an average operating margin of negative 7.5% over the last year. This happened because the company spent loads of money to capture market share. As seen in its fast revenue growth, the aggressive strategy has paid off so far, but it’s unclear what would happen if MongoDB reeled back its investments. Still, we’re optimistic the business can continue growing and reach profitability upon scale.

Final Judgment

MongoDB’s positive characteristics outweigh the negatives, and with the recent rally, the stock trades at 10.3× forward price-to-sales (or $320.00 per share). Is now the right time to buy? See for yourself in our full research report, it’s free for active Edge members.

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