Software Stock Could Score Investors Further Gains

It's important to take some risk off the table, however

Managing Editor
Jul 14, 2023 at 10:00 AM
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Subscribers to Chart of the Week received this commentary on Sunday, July 9.

Back in December, our very own Senior Market Strategist Matthew Timpane CMT, participated in MoneyShow's Top Picks special report for 2023. Six months into the year, two of his best investment ideas cracked MoneyShow's "Top 10" list. Below is a postmortem on MongoDB Inc (NASDAQ:MDB), which etched in its place at #1. We'll also be taking a look at what could be next for the software giant, as well as how bulls can mitigate risk while continuing to take home more gains on MDB.

A MongoDB Masterpiece

MongoDB’s Atlas database saw a revenue increase of 61% year-over-year. The fully managed platform has been a sought-after cloud database model that ensures customers don’t have to worry about upgrading or setting up new storage, as it will automatically scale. However, consumption remained well below historical levels at the time of Timpane's bull pick, and looked poised for a rebound.

A slew of key partnerships were also boosting the cloud concern, specifically with big names Amazon Web Services (AWS), Microsoft Azure, and Google Cloud. These partnerships looked to be a great benefit for growth in database and cloud integrations for MongoDB. Chart support was also coming into play for the shares, specifically the 2019 and 2020 $150 horizontal level of resistance. The stock was trying to approach and hold the $10 billion market cap level, while also finding a floor near $144 -- six times its initial public offering (IPO) price.

Revenue for the company was expected to grow +28% in 2023, with a price/sales ratio of 9.03, which had not been seen since 2018. An increase in revenue growth was also expected. In terms of technical analysis, brokerage firms were split, with a handful still sporting tepid "hold" or worse ratings. This left the tech name open to bull notes and tailwinds.

Short interest, was on the rise and there also looked to be significant put open interest at the 185- and 200-strikes, which left room for more support after the stock’s late-2022 post-earnings bull run. Lastly, MDB carried an Schaeffer's Volatility Scorecard (SVS) of 94 (out of 100), indicating the stock tends to outperform said expectations – a boon for options buyers.

From the end of December when Timpane suggested the 2023 bull pick, to the beginning of July, MongoDB stock has more than doubled in price. While the equity was already enjoying a steady climb up the charts, an early June fiscal first-quarter beat-and-raise sent the shares into a 28% post-earnings bull gap, which preceded a June 30 one-year peak of $418.69.



Where Do We Go Next?

While there still looks to be further room for improvement, Timpane suggests taking at least some risk off the table. Leaving a partial position will give potential for more profits, but the market may see a rotation away from tech for the next few months -- though once through October expiration, the sector historically comes back to rally.

Of the current market climate for MDB, there have only been a few upgrades this year, despite its impressive run. Short interest is down from January, but is basing, and a short covering rally began in the first half of 2023. 

Total Estimated Revenue Growth expanded to 47.1% for 2023, after the company enjoyed its aforementioned Q1 beat. We can also expect a boost in revenue from generative artificial intelligence (AI) due to accelerating application development for new functionality, as big data enters a new paradigm shift.

The stock is still sporting an elevated SVS of 74 out of 100. Even further, at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), MDB sports a 50-day put/call open interest ratio of 1.36, which ranks in the 98th annual percentile. In simpler terms, should this bearish sentiment begin to unwind, it could trigger further tailwinds for the software giant. 

However, like we mentioned earlier, risk remains, with potential for macro headwinds. To alleviate unnecessary risk, it's suggested to cut any remaining position if the stock breaks below the 200-day moving average.


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