MongoDB Stock: Strong Second Quarter Eases Competitive Concerns (NASDAQ:MDB)

( from MongoDBNASDAQ: MDB) The second quarter results were solid, contributing to a strong rally in the company's share price. However, forward-looking guidance and reasonably optimistic comments from management may have been the factors most responsible for the share price movement.

Following weak first quarter results, sentiment Optimism about MongoDB had become overly pessimistic, and investors were beginning to question the company's competitive positioning. However, MongoDB's ability to continue to gain customers and expand among existing customers at a healthy pace should help allay some of these fears, as should MongoDB's comments about the rise of its Search product.

I previously suggested that after the share price drop in the first quarter, MongoDB was positioned to generate fairly strong returns for investors over a long enough period of time. However, I felt that the company could be in for a prolonged period of weakness, due in large part to the weak demand environment and MongoDB's large investments in Future growth, which continues to impact margins. While MongoDB's second quarter results were solid, I expect fairly flat growth and margins in the near term, rather than a significant improvement in performance.

Market conditions

MongoDB experienced a broad-based consumption slowdown in Q1 FY25, which carried over into Q2. Cloud spending appears to be picking up again, but this may be primarily driven by AI, limiting its broader implications. MongoDB’s growth has closely tracked AWS’s in the past, but I think there’s a chance the growth rate of the two businesses will diverge in the future due to the impact of AI.

However, the macroeconomic environment is not impacting MongoDB’s ability to attract new customers. As a result, I expect the company’s growth to rebound strongly when macroeconomic conditions improve. While lower interest rates could be a catalyst for increased demand, this must be weighed against the risk of a recession.

While there remains high expectations around AI, it’s not yet a significant boost for MongoDB. Enterprises are generally directing investment toward hardware and developing base models. Additionally, many companies that want to implement AI are still experimenting with the technology. Elastic (ESTC) has suggested that projects are starting to move toward production, although MongoDB hasn’t seen many inference workloads in production.

Generative AI should force enterprises to modernize their infrastructure, which is the real opportunity for MongoDB. AI can also accelerate this shift by reducing the cost and time to modernize legacy applications. While MongoDB has promising initiatives in this area, it is too early for it to be a growth driver.

MongoDB Enterprise Updates

MongoDB is considered to be the ideal data layer for AI applications as it can process queries on complex data structures quickly. It also eliminates the need for multiple database systems, reducing complexity. This article is a good overview The unique demands of generative AI and why MongoDB is well positioned against something like PostgreSQL. MongoDB also believes it is positioned to benefit as LLM latency decreases and real-time data becomes more important.

To drive the adoption of MongoDB for AI use cases, the company has launched the MongoDB AI Application Program. This program offers customers a variety of resources (reference architectures, end-to-end technology stack, professional services, unified support system) to help them deploy AI using MongoDB.

MongoDB has also been testing programs with customers to move legacy applications to its database. Migrating from a relational database to a document database is relatively easy. The hard part is rewriting the applications. However, generative AI has the potential to make this a much less laborious process. MongoDB has seen a dramatic reduction in the time and cost of rewriting application code and generating test suites that ensure the new code works the same as the old. However, it will take some time for this program to generate significant revenue.

MongoDB is seeing solid momentum in search, validating the company’s belief that its platform can address all use cases. Delivery Hero is using MongoDB Atlas Vector Search, and one of the world’s largest gaming companies switched its content moderation platform to Atlas and Atlas Search. This company is using Atlas Search Nodes to isolate the workload and achieve high performance. Stream Processing was made generally available in May, and there has reportedly been strong interest.

Financial analysis

MongoDB generated $478 million in revenue in the second quarter, up 13% year-over-year. While this may not sound like much, much of this is due to a difficult comparable period in the prior year due to the accounting treatment of multi-year licenses. If this growth is adjusted, it is closer to 22%. Atlas revenue only increased 27% year-over-year, although consumption growth was better than expected in the second quarter.

MongoDB expects third quarter revenue of $493 million to $497 million, up 14% year over year. For the full year, the company expects revenue of $1.92 million to $1.93 million, also representing a 14% growth rate. MongoDB faces increasingly challenging comparable periods as the year progresses due to unused Atlas commitments from the prior year.

MongoDB had 50,700 total customers at the end of the second quarter, up 13% year-over-year. There were 2,189 customers with more than $100,000 ARR, up 18% year-over-year.

MongoDB’s retention rate remained strong in the second quarter. The company’s net annual recurring revenue (ARR) growth rate was 119%. While MongoDB has been trying to focus sales on acquiring higher-quality workloads, it is too early to assess the impact of this.

The number of job postings mentioning MongoDB in the job requirements rebounded modestly in early 2024 but has remained fairly stable in recent months. MongoDB continues to attract new customers at a fairly healthy pace, supporting the idea that demand for its software remains strong.

MongoDB’s gross margin declined year-over-year due to a lower mix of high-margin licensing revenue. While Atlas’ gross margins remain lower, the gap is narrowing. Services margins are also a drag at the moment, although services are now a relatively small contributor to revenue.

MongoDB's non-GAAP operating margin was 11% in the second quarter. However, the quarter benefited from the timing of marketing activities and other expenses. This is expected to repeat in the second half, impacting margins.

Cash flows will also be under pressure for a number of reasons. MongoDB began paying some cloud costs upfront in the second quarter in exchange for a price discount. This is expected to have a negative impact of $20 million per quarter on cash flows in the second half. MongoDB is also investing between $20 million and $25 million in the third quarter to acquire IPv4 addresses, which will reduce cloud infrastructure costs going forward.

The number of job openings at MongoDB continues to rise, suggesting that the company is not facing any issues beyond a temporary weakness in demand. However, I don't expect a significant increase in growth in the near term, meaning that hiring is likely to impact margins going forward.

Conclusion

While MongoDB's Q2 results were strong, I don't expect a significant reacceleration of the business in the near term. The demand environment remains weak, and it will take some time for MongoDB to see any real benefit from generative AI. MongoDB is also still investing aggressively in future growth, which will likely limit near-term profitability improvements.

While MongoDB's stock price has risen significantly from 2024 lows, its valuation remains attractive given the company's long-term potential. MongoDB still has the potential to grow more than 30% annually in a higher demand environment and should generate high margins as it matures. However, I am fairly neutral on the stock at this time due to the likelihood that weakening economic conditions will further undermine consumer growth.