In 2024, MongoDB launched its AI Applications Program (MAAP) to capitalize on the growing role of AI in application development and legacy modernization. MongoDB has launched multiple pilots with customers to use AI-driven tools and professional services to modernize legacy applications. Early results are promising, demonstrating cost reductions of over 50% for these modernization projects. This not only reduces the risk and time involved but has also spurred growing customer interest in transitioning to MongoDB's platform. While still in the pilot phase, these initiatives highlight MongoDB's potential to capitalize on the modernization wave.

A Market in Transition

The database industry is undergoing a significant transformation. Relational database management systems (RDBMS) still dominate, with 72% of the market as of 2024. However, the NoSQL market is growing rapidly, with projections indicating a compound annual growth rate (CAGR) of 29.5% through 2032, reaching a market size of $103.26 billion. Within the document database segment, annual growth is expected at 23%, while analysts project MongoDB itself to grow at 17% CAGR over the next two years.

MongoDB has a long runway for growth, especially given its current market share of less than 5% in a market valued at over $100 billion annually.

The Good

MongoDB has had a great third quarter in FY2025, delivering results that exceeded expectations, bouncing back from a challenging first half of the year.

With revenue reaching $529.4 million, a 22% increase year over year (YoY), MongoDB outperformed expectations. This growth was driven by its two core revenue streams: Atlas and Enterprise Advanced (EA). While Atlas continues to be the company's growth engine, with revenue increasing by 26% YoY, EA also exceeded projections due to several large multi-year deals. Together, these results not only showcase MongoDB's ability to scale but also highlight its operational strength in balancing innovation with profitability.

This financial success was reflected in other key metrics as well. Adjusted earnings per share climbed 21% YoY to $1.16, while non-GAAP operating income reached $101 million, resulting in a 19% non-GAAP operating margin. Even the GAAP net income margin, though slightly negative at -1.8%, showed meaningful improvement, supported by high-margin multi-year deals and slower growth in operating expenses relative to revenue.

During the quarter, MongoDB added 1,900 new customers to its platform, marking a significant expansion of its customer base. This brought the total count to 52,600, marking a 13% increase YoY. Notably, the majority of this growth came from Atlas, which reached over 51,100 customers by the end of the quarter. Among these were 2,314 customers generating more than $100,000 in annual recurring revenue (ARR), a 17% increase compared to the previous year. The company's ARR net expansion rate remained strong at approximately 120%, underscoring its ability to not only retain but also grow its relationships with existing customers.

Sales productivity, which had been a concern earlier in the year, also showed signs of recovery. MongoDB's sales teams demonstrated improved efficiency in acquiring new business and expanding workloads within existing accounts. This rebound can be attributed to the company's refined go-to-market strategy, which focuses heavily on enterprise accounts where the potential returns are strongest. The stability of the macroeconomic environment has further supported MongoDB's ability to align its sales efforts with customer priorities, particularly in areas like enterprise modernization and AI-driven workloads.

MongoDB's financial stability further supports its long-term ambitions. With $2.3 billion in cash and equivalents and $1.1 billion in convertible debt. Although free cash flow (FCF) remained flat at $35 million for the quarter, this was in line with expectations, given upfront payments to cloud service providers and ongoing investments in future growth. Additionally, MongoDB is making strategic capital expenditures, including a $20-25 million outlay for the purchase of IPv4 addresses, which began in November. These investments are expected to contribute to margin expansion starting in FY2026, reinforcing MongoDB's disciplined approach to balancing growth with profitability.

Source: Author based on the company's numbers

Looking ahead, management's confidence in the company's trajectory was evident in the revised FY2025 guidance. For the second quarter in a row, MongoDB raised its full-year revenue expectations, now projecting 17% YoY growth, well above the 11% guidance issued at the start of the fiscal year. The company also anticipates fourth-quarter revenue growth of 13%, driven by improving Atlas consumption trends and a robust pipeline of EA deals. While seasonal slowdowns are expected in the final quarter, the upward revisions reflect MongoDB's strengthening position and ability to execute in a challenging environment. Despite these encouraging signs, the market's reaction to the guidance has been surprisingly subdued. The stock price, which plunged earlier in FY2025 after the initial conservative guidance, has struggled to recover, currently trading near the levels seen in Q2

The Call

During the earnings call, management reiterated their strategic initiatives that include:

First, MongoDB is doubling down on its enterprise channel, a segment where it observes the highest returns. This includes expanding the strategic account program next year and reallocating resources from the mid-market to up-market investments. The goal is to deeply penetrate large enterprises by educating developers on MongoDB's benefits, particularly those accustomed to SQL. To fund these enterprise efforts, MongoDB is reallocating resources from the mid-market, which remains valuable but will be served more efficiently through self-serve channels and technology-enabled sales.

Second, MongoDB is leveraging AI to accelerate legacy application modernization. Early pilots using AI tools, professional services, and the relational migrator product have shown over 50% cost reductions in modernization projects, exceeding customer expectations. MongoDB is scaling professional services to meet demand and plans to automate modernization efforts over time. While it will take time to scale this initiative, the company sees it as a significant long-term growth driver.

Third, MongoDB is capitalizing on its technical advantages for AI applications. The ability to query rich, complex data structures is crucial for AI, and MongoDB's architecture excels in this area. The company is expanding its MongoDB AI Applications Program (MAAP), offering tools like search and vector services and integrations with leading AI tech providers. They also highlighted the release of MongoDB 8.0, which delivers 20%-60% better performance than prior versions, meeting stringent customer demands for security, resiliency, and speed.

The Bad

Management highlighted some expected near-term challenges which I believe was the main reason for the stock to sell off, particularly related to MongoDB Atlas and customer metrics.

First, Atlas consumption is projected to experience a typical seasonal slowdown in Q4, as application usage tends to moderate during the holiday season. Additionally, since Atlas consumption in Q3 was already lower on a year-over-year basis, the company anticipates continued deceleration in Atlas growth for Q4.

Second, non-Atlas revenue is expected to see a sequential decline in Q4. This unusual trend is due to the significant benefit from multi-year deals recognized in Q3, which is not expected to recur this quarter.

Third, changes to the company's go-to-market strategy and new product introductions will influence reported customer metrics going forward. The reallocation of resources from the mid-market to the enterprise channel is expected to reduce mid-market customer net additions, slowing overall direct sales customer growth. However, management emphasized that this shift will result in higher revenue growth over time, making it a worthwhile trade-off.

Additionally, the introduction of Atlas Flex clusters in Q4 will lead to a one-time drop in the reported customer count. Around 4,000 serverless customers, who contribute negligible revenue, are not expected to transition to the new Flex offering. While this adjustment impacts customer numbers, it has no meaningful effect on the company's revenue.

MongoDB's heavy reliance on stock-based compensation (SBC) continues to raise concerns. During the quarter, SBC accounted for 24% of revenue, totaling $126 million. This is a hefty part of their operating expenses, which means two things: one, it inflates their non-cash costs; and two, it dilutes shareholders over time. Diluted shares have increased by 3% YoY.

Moreover, MongoDB recently announced the redemption of its Convertible Senior Notes due 2026. Holders of these notes have the option to convert them into common stock at a rate of 4.9260 shares per $1,000 principal amount. With the current stock price at $295, every $1,000 in principal equates to $1453.17 in market value. This conversion will result in significant dilution for existing shareholders.

Additionally, MongoDB's Chief Operating Officer, Michael Gordon, recently announced his decision to step down, creating uncertainty about the company's future leadership. Gordon has been instrumental in driving the company's growth and operational success, overseeing its impressive growth trajectory.

Valuation

Valuing MongoDB is no easy task, particularly given its stage of growth. As a company still in its high-growth phase, traditional valuation metrics such as price-to-earnings (P/E) or FCF multiples provide limited insight. MongoDB's earnings remain negative on a GAAP basis, and its FCF is volatile due to ongoing investments in infrastructure and growth. However, alternative valuation approaches and relative comparisons can help understand where the company stands in the market.

Currently, MongoDB trades at a price-to-sales (P/S) ratio of 13x, which is well below its historical average of 20x sales. This might suggest that the stock is undervalued relative to its past. However, a broader industry perspective reveals that MongoDB's valuation is more balanced. Compared to peers such as Snowflake (NYSE:SNOW) and Datadog (NASDAQ:DDOG), which command similarly high growth premiums, MongoDB appears fairly priced. It sits between these two high-growth companies and Oracle (NYSE:ORCL), a more mature competitor with slower growth and a more conservative multiple.

Source: Author

When evaluating MongoDB's intrinsic value, a discounted cash flow analysis proves challenging due to its inconsistent FCF generation. Instead, I applied a terminal EBITDA multiple method, which is more appropriate for high-growth companies transitioning to profitability. Using this approach, I arrived at a price target of $327, representing a modest 10% upside from the current price.

Source: Author

While MongoDB's stock price has lagged behind its recent performance, this valuation disconnect could present an attractive opportunity for long-term investors. The company's raised FY2025 guidance and improving financial metrics signal confidence, yet the market appears to be pricing in near-term headwinds rather than its long-term growth potential. For investors willing to look beyond short-term volatility, MongoDB's current price could represent an attractive entry point. However, MongoDB must continue to aggressively invest in its AI infrastructure to maintain its competitive edge and capture additional market share.

This article first appeared on GuruFocus.