With MongoDB, Inc. (NASDAQ:MDB) It Looks Like You'll Get What You Pay For

Simply Wall St · 10/18 11:13

When close to half the companies in the IT industry in the United States have price-to-sales ratios (or "P/S") below 2.4x, you may consider MongoDB, Inc. (NASDAQ:MDB) as a stock to avoid entirely with its 11x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for MongoDB

ps-multiple-vs-industry
NasdaqGM:MDB Price to Sales Ratio vs Industry October 18th 2024

How MongoDB Has Been Performing

MongoDB certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think MongoDB's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like MongoDB's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. Pleasingly, revenue has also lifted 159% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 18% each year over the next three years. With the industry only predicted to deliver 11% each year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that MongoDB's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that MongoDB maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the IT industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Plus, you should also learn about these 3 warning signs we've spotted with MongoDB.

If you're unsure about the strength of MongoDB's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.