Rising Regulatory Pressures And Hyperscaler Competition Will Squeeze Margins

Key Takeaways

• Regulatory burdens, increasing competition, and shifting industry trends threaten MongoDB's ability to scale, pricing power, and long-term revenue expansion.
  
• High investment needs and reliance on consumption-based pricing heighten earnings volatility and are likely to keep margins depressed.
  
• Accelerating growth in high-margin cloud revenue, robust customer expansion, and AI-driven product innovation position MongoDB for sustained earnings and improved financial flexibility.

Catalysts

Provides general purpose database platform worldwide.

• Ongoing regulatory pressures and increasingly stringent data localization laws worldwide are poised to increase MongoDB's compliance costs and operational complexity, which could limit the company's ability to scale internationally and put downward pressure on future revenue growth.
  
• Rising competition from integrated, cloud-native database offerings by AWS, Azure, and Google Cloud, along with the accelerating commoditization of core database functionality by open-source and hyperscaler alternatives, is set to compress MongoDB's pricing power and erode gross and net margins over time.
  
• The industry migration toward multi-model and unified data platforms is expected to reduce the demand for specialized NoSQL databases, directly threatening MongoDB's addressable market and impairing long-term revenue expansion.
  
• MongoDB's heavy reliance on a consumption-based pricing model leaves it highly vulnerable to periods of economic uncertainty and tightened IT budgets, leading to volatile revenues and unpredictable earnings, especially as larger enterprise customers optimize spend or churn.
  
• Persistent high investments in research, development, and sales & marketing will be necessary for MongoDB to sustain differentiation in a fast-evolving landscape; this will likely suppress operating leverage and keep net margins structurally depressed for the foreseeable future.

MongoDB Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on MongoDB compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming MongoDB's revenue will grow by 14.4% annually over the next 3 years.
• The bearish analysts are not forecasting that MongoDB will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate MongoDB's profit margin will increase from -4.1% to the average US IT industry of 7.1% in 3 years.
• If MongoDB's profit margin were to converge on the industry average, you could expect earnings to reach $223.9 million (and earnings per share of $2.24) by about August 2028, up from $-86.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 109.2x on those 2028 earnings, up from -215.0x today. This future PE is greater than the current PE for the US IT industry at 26.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.14%, as per the Simply Wall St company report.

MongoDB Future Earnings Per Share Growth

Risks

• The accelerating adoption of MongoDB Atlas, which now contributes 72% of revenue and is growing at 26% year-over-year, supports a strong base of recurring, high-margin revenue, which can drive higher revenues and increasing gross margins over time.
  
• Robust customer growth, with record net additions and a total customer base exceeding 57,100-including successful penetration of large enterprises and 75% of the Fortune 100-positions MongoDB for durable earnings growth as its platform becomes increasingly mission-critical.
  
• Ongoing product innovation in AI, real-time analytics, and the acquisition of Voyage AI-coupled with deep integration of AI-ready features such as vector search and embeddings-improves MongoDB's competitive differentiation, allowing for greater wallet share and higher average deal sizes, supporting future revenue growth.
  
• Expansion of self-serve and international channels is enabling efficient acquisition of mid-market and global customers, reducing customer concentration risk and broadening MongoDB's addressable market, which can boost revenues and stabilize long-term earnings.
  
• Strong free cash flow generation, a $2.5 billion cash balance, increased share repurchase authorization, and a demonstrated focus on operating efficiency and margin improvement provide the company with significant financial flexibility to sustain growth initiatives and enhance shareholder returns, positively impacting net income and earnings per share.

Valuation

• The assumed bearish price target for MongoDB is $193.28, which represents two standard deviations below the consensus price target of $272.26. This valuation is based on what can be assumed as the expectations of MongoDB's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $395.0, and the most bearish reporting a price target of just $170.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.2 billion, earnings will come to $223.9 million, and it would be trading on a PE ratio of 109.2x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $226.56, the bearish analyst price target of $193.28 is 17.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.