MongoDB Stock's AI Bubble Burst: Is Now the Time to Buy?

Key Points

• MongoDB had a solid quarter, with growth sustaining above 25% for another quarter, but guidance was weak.
• MongoDB Atlas is gaining traction and has grown to 68% of revenue. 
• Analysts are resetting their targets but remain bullish and see a 15% upside at the consensus. 

Results from MongoDB Inc. NASDAQ: MDB and GitLab Inc. NASDAQ: GTLB suggest a bubble is bursting in the AI market that could impact names like Oracle Corp. NYSE: ORCL, Adobe Inc. NASDAQ: ADBE and Microsoft Inc. NASDAQ: MSFT. 

However, a bubble bursting does not mean the end of AI; it is only a reset of expectations. The results from both software companies reveal strength in their offerings, but guidance undercuts price action and valuation. 

Both guided for growth, only less than what the analysts were forecasting. It's not either company's fault it couldn't live up to what the most optimistic analysts expected; high double-digit growth and broader margins are good. It may take time for the market to regain confidence, but will likely set new highs. 

We are still in the earliest innings of the AI revolution, and there is a solid outlook for growth, cash flow and profits. MongoDB core database product is gaining traction as a must-have application for cloud users because of Atlas and will grow with the industry. Atlas is a fully managed database that manages and deploys MongoDB across cloud borders. 

The latest news includes numerous deployments across Google Cloud, Amazon.com Inc. NASDAQ: AMZN, AWS and Microsoft Azure, bringing the total to 117 cloud regions and providing more leverage for future results.  

MongoDB has a Solid Quarter: Guidance is Cautious

MongoDB had a solid Q4, with revenue up 26.8% over last year. The top line beat the consensus by 500 basis points and is on top of a 36% increase last year. Customer growth drives strength and the widening availability of Atlas. MongoDB Atlas accounts for 68% of the revenue and is gaining ground. Subscriptions led and are up 28% year-over-year (YoY), offset by a 1% decline in services.

Margin news is an area of strength. The gross margin held flat at 75% GAAP and 77% adjusted, but the operating margin widened. The operating margin widened by 500 basis points on improving revenue leverage despite increased spending and left adjusted net income and free cash flow well above expectations. The adjusted earnings came in at $0.86 or up 50% and nearly double consensus, with FCF doubling to $50.5 million. 

Guidance is the weak spot in the news, although revenue is expected to grow by 15% this year. The bad news is that Q1 and FY results are well below the consensus, leading the market to reset its expectations. Given the outlook for cloud spending this year, the opportunity is that guidance is likely cautious. Cloud spending is expected to accelerate to +20%, with growth led by the top three players, Azure, AWS and Google. MongoDB is perfectly positioned to benefit from that growth. 

Analysts Revise Targets for MongoDB: See Double-Digit Upside

The analysts' activity is hot following the Q4 release and guidance update, with more than a dozen of the twenty-five analysts tracked by Marketbeat issuing revisions. The activity is mixed with several lowered-priced targets and some increased, but the takeaway is bullish. The sentiment is firming from "moderate buy" to "buy" with an upgrade issued by D.A. Davidson, raising its price target to $430 and near consensus. 

The consensus target implies a 15% upside and is trending higher, and it is in a position to lead the market now that the price action has corrected. 

MongoDB's price fell as much as 20% in after-hours trading but recovered much of the loss before the open. The stock opened with a loss of only 7% and showed some support at the open. If the market follows through on this opportunity, investors should expect volatility over the next few days, but the market should rebound quickly. If not, MongoDB could fall to firmer support levels near $360 before making a significant rebound later in the year.