The Software Space has had a nasty few months, and MongoDB (MDB) has not been spared. While the Software ETF (IGV) is down just over 12% from its July highs, MongoDB has seen a 40% correction. This pullback may seem like an opportunity to jump in the stock for investors, but the valuation for the stock still remains at frothy levels. While 12-15% bounces are possible to remove oversold conditions, I’m skeptical that we’ve seen the lows just yet. I would consider any rallies that can’t reclaim the $147.00 level on a weekly close to be noise.

(Source: TC2000.com)

MongoDB started 2019 with a bang and was one of the top-performing growth stocks as of the end of Q2. The stock managed to put up an incredible 160% return off of its December lows, outpacing nearly all of its peers. This exceptional performance came on the back of robust revenue growth rates, and a relentless appetite from software names from major growth funds. However, every great story eventually comes to an end, and the $185.00 level turned out to be a brick wall for the stock. While the company’s sell-off after record revenues likely has some investors scratching their heads, it’s not all that surprising if we take a look at the company’s revenue growth rates. Sure, the company did report record quarterly revenue, but its growth rates are decelerating on a sequential basis. This deceleration, combined with an expensive valuation, is likely what has kept a lid on the stock. Let’s take a closer look below:

(Source: YCharts.com, Author’s Chart)

As we can see from the above chart, while we continue to see record revenues each quarter, the year-over-year growth rate continues to decelerate materially. The blue line in the above chart represents the quarterly growth rate, while the white line represents the two-quarter average. I like to use a two-quarter average for revenue growth rates as it helps to smooth out any lumpy quarters and better dictates the overall trend.

Looking at the two-quarter average growth rate, we can see that it was in a steady uptrend from Q2 2019 through to the most recent quarter. However, based on estimates of $97.5 million for fiscal Q3, this growth rate is expected to decelerate by nearly 2000 basis points. Moving forward to Q4, this deceleration is expected to get even worse. The two-quarter average revenue growth rate is likely to slip from a high of 74.5% in Q1 2020 to a new two-year low of 30.5% for Q4 2020. Deceleration is like kryptonite to growth stocks, and funds often start selling as soon as the first hint of a slowdown begins to show up. Based on this, it’s not at all surprising that funds haven’t had a big appetite for MongoDB during this sell-off.

(Source: YCharts.com, Author’s Chart)

While estimates are not set in stone, MongoDB is going to need to report $112.0 million in revenues or higher for fiscal Q3 to dodge any material deceleration. I would classify material deceleration as a sequential drop in growth rates of 1000 basis points or more. While a beat of $4.0 million – $6.0 million on the top-line vs. estimates is certainly possible, I do not see any way that the company manages to beat by $15.0 million to avert deceleration here. Given that deceleration is expected to show up in the next quarter, I am less inclined to believe we have seen the lows just yet.

(Source: TC2000.com)

Given that MongoDB is off 40% from its highs, it’s likely that the funds got ahead of the quarterly deceleration and start selling. Based on this, it’s likely that much of this deceleration is already priced in. However, the stock remains in a downtrend here, and I would not be surprised to see the stock fill its open gap in the $107.00 area before bottoming. This would also line up with the 20-month moving average (green line) above, which often gets tested once every two years or so for most stocks. MongoDB has yet to test this moving average, and a drop down towards this level will be the real test for the stock. If the stock can come down to this level and find support, I would be optimistic that the lows might be in finally. However, this is conditional on MongoDB beating its current revenue estimates. A miss on these revenue estimates coupled with a price to sales ratio of over 20x would be a recipe for disaster.

MongoDB is an exceptional growth stock in a sector known for hyper-growth names, but the company’s growth rates have gone from acceleration to deceleration as we head into the back half of fiscal 2020. Based on this, I would view any rallies that can’t reclaim $147.00 on a weekly closing basis as noise. The time to buy MongoDB and start a position will be if it can fill its gap near $107.00, and show supportive action. Until then, I see the stock as high-risk, and one to avoid.

MDB shares were trading at $125.51 per share on Tuesday afternoon, down $1.37 (-1.08%). Year-to-date, MDB has gained 49.88%, versus a 24.74% rise in the benchmark S&P 500 index during the same period.

About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...

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