MongoDB (NASDAQ:MDB) Beats Q4 Sales Targets But Stock Drops

Database software company MongoDB (MDB) announced better-than-expected results in the Q4 FY2023 quarter, with revenue up 35.6% year on year to $361.3 million. However, guidance for the next quarter was less impressive, coming in at $346 million at the midpoint, being 1.87% below analyst estimates. MongoDB made a GAAP loss of $64.4 million, improving on its loss of $84.4 million, in the same quarter last year.

Started in 2007 by the team behind Google’s ad platform DoubleClick, MongoDB offers database-as-a-service that helps companies store large volumes of semi-structured data.

The standard relational databases function like Excel on steroids, they store data in rows and columns across different tables. This works well if you need to store a lot of data that has a similar structure, but it can create potential inefficiencies if the structure of the data you are storing varies a lot. MongoDB instead stores data in records called documents, which, similarly to a patient’s documents in a doctor’s office, have all the data for one entity in one folder, even though what is in the folder can vary a lot between entities.

Similar to other businesses like Elastic (ESTC), MongoDB is built on a business model that combines free open source software with paid offerings. The paid product has features valuable for enterprise customers and offers a fully hosted service, but developers can also download and use the limited version of MongoDB for free, which makes it really easy to try and evaluate.

Data is the lifeblood of the internet and software in general, and the amount of data created is growing at an accelerating pace. Likewise, the importance of storing the data in scalable and efficient formats continues to rise, especially as the diversity of the data and associated use cases expand from analyzing simple, structured data to high-scale processing of unstructured data, images, audio and video.

Competitors include database providers such as IBM (NYSE:IBM), and Oracle (NYSE:ORCL) as well as cloud offerings provided by Amazon (NASDAQ:AMZN), Google, and Microsoft (NASDAQ:MSFT).

Sales Growth

As you can see below, MongoDB's revenue growth has been impressive over the last two years, growing from quarterly revenue of $171 million in Q4 FY2021, to $361.3 million.

And unsurprisingly, this was another great quarter for MongoDB with revenue up 35.6% year on year. Quarter on quarter the revenue increased by $27.7 million in Q4, which was in line with Q3 2023. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Guidance for the next quarter indicates MongoDB is expecting revenue to grow 21.2% year on year to $346 million, slowing down from the 57.1% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $1.5 billion at the midpoint, growing 16.4% compared to 47% increase in FY2023.

Customer Growth

You can see below that MongoDB reported 40,800 customers at the end of the quarter, an increase of 1,700 on last quarter. That is a little slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. MongoDB's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 75.3% in Q4.

That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a good gross margin that allows companies like MongoDB to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. MongoDB's free cash flow came in at $23.8 million in Q4, up 41.6% year on year.

MongoDB has burned through $24.7 million in cash over the last twelve months, resulting in a negative 1.93% free cash flow margin. This below average FCF margin is a result of MongoDB's need to invest in the business to continue penetrating its market.

Key Takeaways from MongoDB's Q4 Results

With a market capitalization of $15.5 billion, more than $1.84 billion in cash and the fact it is operating close to free cash flow break-even the company is in a strong financial position to invest in growth.

We were very impressed by the strong improvements in MongoDB’s gross margin this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, it was unfortunate to see that MongoDB's revenue guidance for the full year missed analysts' expectations and it indicates quite a significant slowdown in growth. Overall, it seems to us that this was a complicated quarter for MongoDB. The company is down 9.15% on the results and currently trades at $208 per share.

Is Now The Time?

When considering MongoDB, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although MongoDB is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. Unfortunately, its customer acquisition costs are higher than we like to see.

MongoDB's price to sales ratio based on the next twelve months of 10.1x indicates that the market is definitely optimistic about its growth prospects. We can find things to like about MongoDB and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.

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