Leadership is critical for companies operating in today’s competitive market. The success of these firms relies heavily on the strategy taken, the clarity of messaging, and the morale of the team involved to drive progress. However, the sudden departure of key leaders, like MongoDB’s (MDB) CFO, can be disastrous, and for that reason, I’m bearish on the database giant. While the fundamentals of the business are unchanged and fairly positive in some areas, I see a few red flags for new potential investors.
Pick the best stocks and maximize your portfolio:
Discover top-rated stocks from highly ranked analysts with Analyst Top Stocks!
The company sits in an uncertain place at present. The AI data sector is probably one of the most lucrative and dynamic sectors of the market these days. MongoDB operates in the space as a leader in non-relational database solutions, managing data formats across text, video, and more to support businesses. This sounds complex, but it really just involves storing and using company data in a secure, useful, and organized way for analysis and improved customer experiences.
MongoDB’s Atlas system has been essential for customers in managing this evolving data landscape. A massive 68% of company revenues come from this single product, and despite this impressive feat, the share price has had a disappointing year. Down over 35% in 2024 alone, investors have suffered amid increased competition.
There Are Some Encouraging Signs
Although I am bearish on MDB, the most recent earnings report has shown plenty of encouraging signs. With over 52,000 customers now in the network and revenue growing by 22% to reach $529.4 million, there is real potential here. Operating margins also improved to 19%, with cash flow stable at about $35 million. Most investors consider the AI revolution to continue well into the future, and with increased demand for data organization and integration, the firm could well be well positioned to benefit.
Nevertheless, I’m most concerned about the firm’s reliance on a single product. With so much focus on Atlas and an enormous amount of competition, having a usage-based model for revenue brings an added layer of uncertainty for investors.
While many companies have locked in customers for long-term service agreements, one mistake or change in market sentiment could see the platform drop in usage overnight. This is especially true in an economic environment where many companies are cutting IT budgets in response to a challenging dynamic.
Michael Gordon’s Departure
Further adding to my bearish sentiment, company CFO and COO Michael Gordon recently announced his resignation, effective from January 2025. Gordon was a key player in the firm’s IPO and its efforts to scale. Many would say he has laid out the groundwork for MongoDB, building out the financial and cultural elements that took it to where it is today.
With the sector evolving quickly, the leadership team will have to ensure it moves in the right direction to progress its strategy. While Gordon will work as an advisor to ensure a smooth transition, management will need to ensure the new CFO is able to hit the ground running at a challenging time for the company and at a moment when the competition will be looking for any opportunity to seize market share. The 7.4% drop in the share price following the announcement reflects this concern from the market.
Three Key Challenges to Overcome
From my perspective, there are three key challenges that make me bearish on MDB Stock:
1. Profitability– With the firm forecast to not make a profit (on a GAAP basis) over the next three years at least, investors will need to be encouraged that the company is edging closer towards sustainability. However, with earnings growing at a slower pace than the wider sector, 12.6% compared to 14.8%, the company needs to watch that it is able to reach this point before competition is able to dominate.
2. Valuation– Investors may be concerned about the firm’s fairly premium valuation despite the recent sell-off. With profits unlikely to be seen any time soon, it may not take much for patient investors to look elsewhere. A basic discounted cash flow (DCF) calculation suggests the fair value of shares is at $178.15, a full 50% below the current price.
3. Volatility– As I noted, the company’s usage based model leads to uncertain revenues, leading to fairly erratic stock performance. I would like to see a more diversified strategy and more certainty for investors.
MongoDB’s Market Outlook
I’m nervous that competitors such as Oracle (ORCL) are moving quickly to seize market share across a range of sectors. With vast resources, a strong balance sheet, and a diverse product portfolio, there are plenty of companies that may be able to move in on the areas MongoDB currently specializes in.
The company has a solid $2.3 billion in cash, far outweighing the $1.2 billion in debt, but the market capitalization of $19 billion compared to Oracle’s $484 billion shows what type of competitors MongoDB will be up against in the coming years.
Still, Wall Street analysts seem to suggest that some major opportunities are ahead for the company. With a price target of $379.75 per share, these analysts are implying 50% upside potential from the current level.
However, I’m less optimistic at this level. With a fair degree of uncertainty following Michael Gordon’s departure and enormous competition in the sector, I would want to see more solid rates of growth in customer acquisition and revenues, along with a valuation that provides more margin for error.
Of course, there are risks to my bearish sentiment. To begin with, there is clearly a great product at the heart of the company. Recent partnerships with Amazon’s (AMZN) AWS and Microsoft (MSFT) indicate that MongoDB has an important role in the development of the AI ecosystem. Advanced features in these systems may be superior to other products out there, as recognized by the Technology Partner of the Year award in North America and by the launch of various university courses for the MongoDB platform.
If the firm can continue to build a meaningful presence in the sector and, most importantly, keep it amid rising competition, there may be some signs of profitability over the coming decade. With so much demand and growth possible across AI, if the platform can become an effective source of information, enabling further scaling and features, then there is plenty of potential.
Summing Up
However, for me, the company has a lot to do before I can see a path towards sustainable profits. In today’s environment, a good product is not enough. The share price needs to be sensibly valued, with a diverse and resilient range of revenue streams, and the scale of innovation needs to be backed up by a competitive advantage across the sector, especially when going up against companies with larger resources.
I see some promising signs for the company over the coming decade, but I would suggest that the risks currently outweigh the rewards for new investors. I’ll be staying on the sidelines and keeping an eye on MongoDB for less bearish times.
