MongoDB Defies Doubters With Strong Q2 Performance

Database software expert MongoDB (MDB -2.12%) reported earnings on Thursday, and the results left analyst expectations far behind. The stock soared more than 18% higher shortly after Friday's opening bell.

In most cases, that would be a simple story. Surprising financial strength leads to a triumphant stock jump. The end. But it's more complicated for MongoDB, whose big jump didn't come close to making up for recent drops.

This uncomfortable situation raises a few questions:

• How good were MongoDB's second-quarter results, really?
• Why is the stock trending down in 2024?
• What is the company doing to turn the tide?

Let's see if I can find answers to these burning questions, with the help of MongoDB's second-quarter earnings report and conference call.

MongoDB's Q2 earnings beat all expectations

The stock is down 15% from the day before its first-quarter report three months ago, and there's a 44% gap to February's 52-week highs. As I said, Friday's jump wasn't nearly enough to make up for recent price drops.

At first glance, the quarterly report checked all the boxes for a bullish financial update. Revenue rose 13% year over year to $478 million. Your average financial analyst had expected roughly $464 million, in line with MongoDB's guidance. Adjusted earnings landed fell 25% year over year, landing at $0.70 per diluted share. That was still far above the analyst consensus at $0.49 per share, which matched the top end of management's official guidance range.

At second glance, you should know that MongoDB's stock crumbled in May due to low guidance targets for this second-quarter report. CEO Dev Ittycheria explained that the back half of the year looked challenging due to slower-than-expected sales of the cloud-based MongoDB Atlas database service. So he set the second-bar low, resulting in a sharp stock price cut.

Against that backdrop, let's compare MongoDB's actual results to the analyst projections three months ago, before that disappointing guidance update. As it turns out, MongoDB crushed those targets, too:

Data source: Results from MongoDB's earnings report, analyst targets confirmed with multiple sources.

So MongoDB blew those old targets out of the water, too. In other words, management set some overly conservative targets three months ago, took a market beating as a result, and wasn't fully forgiven for that mistake when the real numbers came in above every expectation.

MongoDB's sensible, yet optimistic, strategy

In a broader sense, investors and analysts worry about MongoDB's strategic direction.

Despite narrowing gross margins and a challenging sales environment, MongoDB is boosting its operating costs. The second-quarter sales and marketing budget rose 13% year over year, in line with the surprisingly strong revenue boost. Research and development (R&D) took an even stronger 19% jump, resulting in lower profit margins and slimmer bottom-line profits.

That's an adjusted view, by the way. MongoDB reported $421.3 million in operating expenses, but that includes $123.8 million of stock-based compensation instead of cash-based paychecks. On the basis of generally accepted accounting practices (GAAP), the company reported a net loss of $54.5 million, or $0.74 per share.

Stock-based compensation can be an effective strategy in good times, but employees may feel less motivated by those stock allowances when share prices are going down.

On that note, I'm happy with MongoDB's recent compensation moves. The stock-based compensation component actually shrunk by 2% year over year, with a 15% drop in the sales and marketing department. The company is investing real cash in its workforce here, a morale-boosting idea in a period of slower business growth. And the notion of increased R&D and sales budgets in these trying times is absolutely correct -- technology experts are more likely to fix business problems with intensified product development than by cutting costs and corners.

MongoDB's long-term outlook in the booming AI era

The boosted operating budget is paying off. The stalled MongoDB Atlas sales got a second wind with 27% year-over-year revenue growth, and management sees brighter days ahead.

Its non-relational database model is a natural fit for requirements of the artificial intelligence (AI) space, especially where the data sets are large and disorganized. You know, like the real world and the messy data that people collect from it. As a result, many of MongoDB's recent contracts are with companies pursuing various types of generative AI.

MongoDB isn't a cheap stock, despite the persistent share price drop and this week's strong results. The stock trades at 93 times non-GAAP earnings and 11.7 times sales, which is lofty territory even for a high-octane growth stock.

At the same time, I like what I see in MongoDB's long-term strategy and business opportunity. The company has secured less than a 1% slice of the massive market for enterprise-class databases, and I expect it to continue stealing contracts from industry giant Oracle for years to come.

All things considered, MongoDB's stock may deserve a closer look if you're searching for an alternative angle on the generative AI boom.