Shares of database software up-and-comer MongoDB (MDB 6.04%) cratered 35.4% in May, according to data from S&P Global Market Intelligence.
MongoDB happened to report first-quarter earnings on May 30, and the subsequent reaction on the final day of the month accounted for a bulk of the decline. While revenue and non-GAAP (adjusted) earnings per share (EPS) beat expectations, management's forward-looking guidance caused shares to plunge.
A deceleration in growth for a high-multiple stock
MongoDB is a new kind of database company based on something called a "document" architecture, a more flexible kind of format compared with legacy relational databases, and better suited for storing and processing both structured and unstructured data (images, videos, social media posts). Thus, adoption of the company's software has taken off over the six and a half years since MongoDB went public.
That solid growth appeared intact last quarter, as revenue grew 22% to $450.6 million, while adjusted EPS came in at $0.51 per share, with each metric exceeding expectations.
However, management guided lightly for the current quarter, forecasting $460 million to $464 million, with adjusted EPS of $0.46 to $0.49, below the average analyst forecast of $473 million and $0.58, respectively. The company also took down its full-year estimates, with revenue guidance of $1.88 billion to $1.9 billion, and adjusted EPS of $2.15 to $2.30, down from prior guidance of $1.9 billion to $1.93 billion and $2.27 to $2.49, respectively.
MongoDB also wasn't exactly cheap heading into earnings, with a price-to-sales ratio in the mid-teens, relative to a P/S ratio of 9.5 today.
When a high-multiple growth stock gives disappointing guidance and lowers prior forecasts, that's really not a good thing.
In explaining the slowdown, management pretty much blamed both a cautious macroeconomic environment, as well as perhaps acquiring customers in the prior year that had large volumes but not as much consumption growth potential. CEO Dev Ittycheria also intimated that enterprise customers have been more focused on training artificial intelligence (AI) models and experimenting, but haven't yet developed a lot of AI applications with those models, in which case they would need to purchase more consumption from MongoDB.
A buying opportunity?
While MongoDB was never a cheap stock, it is regarded as the best-in-class name of document databases. And in an AI-powered world, the advantages of MongoDB's architecture could win the day. Ittycheria did give an optimistic long-term forecast beyond this year, saying:
We also see a tremendous opportunity to win more legacy workloads, as AI has now become a catalyst to modernize these applications. MongoDB's document-based architecture is particularly well-suited for the variety and scale of data required by AI-powered applications. We are confident MongoDB will be a substantial beneficiary of this next wave of application development.
If that proves true, MongoDB could be a great long-term buy on this dip. It may just be that there's a pause in its AI-fueled growth potential today, until enterprises train their models and are then ready to develop AI applications. Put MongoDB on your watch list after the drawdown.
