MongoDB has gotten torched over the last six months - since November 2024, its stock price has dropped 41.3% to $189.25 per share. This might have investors contemplating their next move.
Is now the time to buy MongoDB, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is MongoDB Not Exciting?
Even with the cheaper entry price, we're swiping left on MongoDB for now. Here are three reasons why you should be careful with MDB and a stock we'd rather own.
1. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
MongoDB’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.
2. 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 10.8% 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.
3. 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 5.7%, subpar for a software business.
Final Judgment
MongoDB isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 7× forward price-to-sales (or $189.25 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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