Shares of MongoDB (NASDAQ: MDB) rose 15.2% in August, according to data provided by S&P Global Market Intelligence. The company extended its streak of beating quarterly earnings estimates, and its forward-looking commentary impressed investors looking for signs of growth and profitability.

MongoDB smashed quarterly earnings expectations

MongoDB reported earnings on Aug. 29, and investors were impressed. The company delivered 13% revenue growth, driven by subscription sales. Its top and bottom lines were comfortably higher than Wall Street's forecast, and investors were also pleased to see that the company was increasing its full-year guidance.

The results on the bottom line were even more impressive than the sales figures. The $50 million expansion in revenue over the prior year allowed the company to reduce its burn rate. MongoDB's free cash outflow was $4 million last quarter, down from $27 million the preceding year. The company is cash flow positive year to date, which is an important consideration.

Reviewing the P&L suggests that MongoDB is still not profitable, but that doesn't mean that it's burning through the liquidity on its balance sheet. The company has around $2 billion of short-term liquid assets on the balance sheet, so the ability to operate without burning cash is an important step.

MongoDB has now significantly outpaced Wall Street's expectations for several consecutive quarters. The latest quarterly update prompted numerous analysts to update their earnings forecasts for the next two years, most of which were higher. When consensus outlook improves, it tends to push stocks higher, and that force was at work here last month.

Valuation is more reasonable, but it is still an issue for investors to consider

Even with the strong performance in August, MongoDB stock is down 25% over the trailing year. The company's rate of expansion has slowed, causing investors to apply scrutiny to its valuation.

The stock's price-to-sales (P/S) ratio dropped 35% to 11.4 over the last 12 months, while its forward P/E ratio tumbled 10% to 117. These are still somewhat aggressive valuations, but some of the risk has been removed -- the stock price dropped while the company expanded and marched toward breakeven. It's now cheaper relative to the actual financial performance of the underlying business, which is good for new buyers.

It's difficult to apply standard valuation techniques to high-growth companies that are just achieving profitability. Once the company reports positive net earnings, the growth rate of its bottom line will be exceptionally high as it expands from a small number.

Nonetheless, with a revenue growth rate under 20% and P/S ratio over 10, it's fair to conclude that the stock still has speculative buyers. Long-term investors can justify a buy at this price, but they should be prepared for volatility at this valuation.

Should you invest $1,000 in MongoDB right now?

Before you buy stock in MongoDB, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and MongoDB wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $630,099!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks ?

*Stock Advisor returns as of September 9, 2024

Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends MongoDB. The Motley Fool has a disclosure policy.

Here's Why MongoDB Stock Gained 15% Last Month was originally published by The Motley Fool