Shares in MongoDB (Nasdaq: MDB) rallied more than 15% on Friday after an initial post-earnings selloff during the previous session. While the company lowered 2nd quarter guidance, investors have chosen to focus on strong year-on-year revenue growth and the slightly narrower than expected loss per share. The company also reported a lower gross margin while raising its outlook for full-year revenue.

 

Atlas Leads Growth

The company’s sales for the quarter totalled $89.4 million, reflecting 78% year-over-year growth. Subscription revenue, which accounted for 94% of total revenue, grew 82%, while professional services revenue was 33% higher. Total revenue was $5.9 million better than analysts expected.

The adjusted loss was $0.22 versus the $0.24 loss analysts expected, while the GAAP loss was $0.61 which was $0.12 worse than expected.

Revenue growth was boosted by 340% growth in sales of the Atlas database product. Atlas now contributes 35% of total revenues but has a lower gross margin – this meant the overall gross margin fell from 74% to 70%.

 

Revenue Guidance Raised, While Loss Expected to Widen

The midpoint for the full year’s guidance for revenue was raised from $367 million to $378 million. However, the loss per share is expected to be about 5 cents more than previously anticipated. The 2nd quarter’s loss per share is also expected to be at the high end of analyst forecasts.

The fact that the company is looking for higher revenues while also expecting the loss to widen, may point to further margin compression in coming quarters, either at the gross or operating level.

 

Is There More Room to Run?

MongoDB is operating in a very exciting niche. While larger cloud companies are allowing companies to migrate their business to the cloud, Mongo is helping those companies organize their data, and giving them flexibility with regard to how it is managed.

The company is now the standout DBaaS (database as a service) pure play, and with a market cap of $8 billion, it’s reasonable to believe there is lots of room to grow.

Some analysts believe Mongo is going to start facing competition from competitors with far deeper pockets – i.e. Google, Microsoft, etc. This may be a serious problem for a company with no real cash flows.

Since March, six analysts have reiterated or initiated buy ratings on MongoDB, with price targets between $125 and $178. The price chart is also very bullish — a large bull flag puts the medium-term target at $190 to $210. The short float is fairly high at 17.5%, which is no doubt adding momentum to the rally.

While the setup is bullish, there is some reason for caution. The stock price is now up nearly 500% since the IPO in 2017 and is trading on a price to sales ratio of close to 30. At some point, the company will need to turn a profit, which means it needs to grow revenue while maintaining gross margins and containing operating costs. Some analysts believe Mongo is going to start facing competition from competitors with far deeper pockets – i.e. Google, Microsoft, etc. This may be a serious problem for a company with no real cash flows.

In short – the long-term outlook looks good, but there may be some challenges in the next few quarters, which may provide a better buying opportunity for long term investors. In the short term, further upside looks likely, but the downside risk in the event of a reversal would be very high. Traders may want to look for continuation setups on shorter time frames to better manage risk.