MongoDB Inc. (MDB), which is headquartered in New York City, is a leading modern, general-purpose database platform built to maximize the potential of software and data for developers and the applications they build. The stock has gained 45.6% in price over the past year by capitalizing on the rapid digital transformation and business organizations’ high dependence on cloud collaboration platforms to process large volumes of business data and enhance scalability.

However, the company's shares have declined 12.7% in price over the past month due to the sell-off of technology stocks last month on rising interest rates. Higher 10-year Treasury yields have been a matter of concern for tech investors because rising interest rates reduce the long-term growth potential of fast-growing technology businesses.

In addition, the industry's strong growth prospects are fostering fierce competition among existing and new players. Investors' optimism surrounding the industry's growth has led the stock of several industry participants, including MDB, to hit valuations that are not in sync with their current or projected financials. Furthermore, with U.S. Treasury yields rising ahead of the Federal Reserve's December policy meeting, MDB's shares may suffer in the near term.

Click here to check out our Software Industry Report for 2021

Here is what could shape MDB's performance in the near term:

Inadequate Financials

MDB's operating loss increased 32.2% year-over-year to $76.77 million for its third fiscal quarter, ended October 31, 2021. Its net loss grew 11.8% from its  year-ago value to $81.29 million, while its loss per share amounted to $1.22. The company's net cash used in operating activities came in at $15.33 million for the nine months ended October 31, 2021. In addition, its total operating expenses increased 44.5% from the prior-year quarter to $235.19 million.

Weak Profitability

MDB's 0.42% trailing-12-months asset turnover ratio is 34% lower than the 0.64% industry average. Also, its ROC, net income margin and ROA are negative  11.4%, 38.3%, and 12.7%, respectively. And its trailing-12-months cash from operations stood at a negative $33.98 million compared to the $118.48 million industry average.

Premium Valuations

In terms of forward Price/Book, the stock is currently trading at 52.23x, which is 802.5% higher than the 5.97x industry average. Also, its 39.28x forward EV/Sales multiple is 850.8% higher than the 4.13x industry average. Furthermore,  MDB's  39.95x forward Price/Sales of is 868.4% higher than the 4.13x industry average.

POWR Ratings Reflect Uncertainty

MDB has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MDB has an F grade for Value. The company's higher-than-industry valuations are in sync with the Value grade. In addition, the stock  has a C grade for Quality, which is justified given its poor financials and profitability.

Of the 168 stocks in the F-rated Software Application industry, MDB is ranked #107.

Beyond what I have stated above, you can view MDB ratings for Stability, Growth, Momentum, and Sentiment here.

Click here to check out our Software Industry Report for 2021

Bottom Line

Over the past year, the software industry has attracted significant investor attention thanks to the remote working culture and rapid digital transformation. However, we believe MDB is best avoided now, given the heightened industry-wide competition, the stock’s premium valuation, and the company’s poor profitability.

How Does MongoDB Inc. (MDB) Stack Up Against its Peers?

While MDB has an overall D rating, one might want to consider its industry peers, Open Text Corporation (OTEX), Commvault Systems Inc. (CVLT), and National Instruments Corporation (NATI), having an overall A (Strong Buy) rating.          

MDB shares were trading at $481.95 per share on Tuesday morning, down $12.98 (-2.62%). Year-to-date, MDB has gained 34.23%, versus a 25.05% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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