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1. Introduction
We are in the midst of a bear market and growth stocks have suffered the most. One of them is MongoDB (NASDAQ:MDB), which collapsed by around 70% from its all-time high.
Consequently, MDB has underperformed all the major indices, such as the S&P 500, Nasdaq as well as the Russell 2000 (see chart).
Price % off high – MDB vs indices (YCharts)
Well, is MDB a tempting buy after the extreme downturn in the share price?
2. Valuation
Evaluating growth stocks is a challenge, especially if they do not yet have a track record of positive cash flows or earnings.
In this context, I have chosen two valuation models:
- the enterprise value-to-sales ratio (EV/S) for valuation purposes, which adds debt and preferred shares to the market cap and subtracts cash and
- the rule of 40 by using the revenue growth rate and EBITDA margin.
With regard to the EV/S ratio and the quarterly sales trend, it is striking that the EV/S ratio has logically fallen sharply from around 48 to currently 10.46 as a result of the slump in the share price, but at the same time, sales are growing sequentially on a quarterly basis.
The lowest EV/S ratio was around 6 in 2018 shortly after the company’s IPO, despite the Fed’s still dovish monetary policy at that time. Consequently, in view of the Fed’s current hawkish monetary policy, the risk-reward ratio seems not yet attractive enough.
MDB EV/S ratios and quarterly revenues (YCharts)
Moreover, the company’s sales growth rates have also come under pressure in the current market environment and could even worsen if a most feared recession occurs (see chart).
MDB’s quarterly revenue growth rates (YCharts)
With regard to the rule of 40, it can be stated that the ratio of 26.11 (47.04 minus 20.93) is too unattractive to consider an investment at the current stage. According to the rule of 40, a promising investment should have a ratio of 40 or more.
Rule of 40 – MDB’s quarterly revenue growth rates and EBIDTA margin (YCharts)
3. Technical Analysis
Looking at the chart, it is apparent that the stock is still trapped in a downtrend, despite a couple of rebounds and breakout attempts (see Chart).
At $188.82, the stock is currently at the Pre-COVID high. It rather seems to depend on the market if the stock can hold the support around $172 or even go up to $245 – or in the worst case – even go down to $124 and lower.
As the stock is caught in a downtrend, the latter scenario is currently more likely.
MDB chart – stuck in a downtrend (TradingView)
4. Conclusion
While MDB has collapsed around 70% from its all-time high, the stock does not yet seem attractive enough from a valuation and chart perspective.
Looking at the valuation, the EV/S ratio as well as the rule of 40 are pointing out red flags for a current investment. The EV/S ratio of 10 is way beyond MDB’s EV/S ratio of 6 in 2018 after the company’s IPO during the Fed’s loose dovish policy.
With respect to the technical analysis, the stock still appears to be caught in a downtrend, which suggests that the stock could fall even further despite brief rebounds and recovery attempts.
So, when would I consider an investment? When: A) the Fed eases monetary policy or at least becomes more dovish and a potential recession does not materialize B) the chart improves, and the stock starts an upward trend, and C) the ratio in relation to the rule of 40 rises above 40.
Ideally, all conditions would be met at the same time.
Article originally posted on mongodb google news. Visit mongodb google news