Over the last six months, MongoDB’s shares have sunk to $201.54, producing a disappointing 17% loss - a stark contrast to the S&P 500’s 5.4% gain. This might have investors contemplating their next move.
Is there a buying opportunity in MongoDB, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is MongoDB Not Exciting?
Even with the cheaper entry price, we don't have much confidence in MongoDB. Here are two reasons why you should be careful with MDB and a stock we'd rather own.
1. 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 is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
MongoDB’s expensive cost structure has contributed to an average operating margin of negative 8.1% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if MongoDB reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
MongoDB has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7.6%, subpar for a software business.
Final Judgment
MongoDB’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 6.9× forward price-to-sales (or $201.54 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the most dominant software business in the world.
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