When looking for growth stocks, it’s often useful to seek out companies trading close to their 52-week low. Sure, it might look like the share price is in freefall — but it could just be that the market is seriously undervaluing their prospects. The trick is figuring out which one it is.
In these instances, it’s sometimes possible to uncover a golden opportunity to secure long-term returns.
Does such an opportunity exist in major US tech stock MongoDB (NASDAQ: MDB), which is down 40% over the past 12 months?
Let’s take a look.
The volatile tech market
Like many other US firms developing groundbreaking new technology, MongoDB’s share price has seen some serious volatility. It initially grabbed the attention of top investors with its NoSQL database tech, which offers a better way to store huge amounts of data. This is a key requirement when it comes to artificial intelligence (AI), so the attention is warranted.
In its short (17-year) lifespan, it has managed to amass a $16.8bn market cap. During the tech boom before Covid, its share price climbed 1,800% from a mere $28 to almost $570.
However, the initial wave of enthusiasm ran dry toward the end of 2021 and things took a downward turn. When the tech market suffered a heavy blow in 2022, MongoDB had 70% of its value wiped off its share price.
By that point, however, it was already established, with over 40,000 customers worldwide. Some of its better-known clients include Novo Nordisk, Forbes, and Vodafone. This may be one reason it easily recovered from the dip, regaining the $400 price level in mid-2023.
Managing expectations
Despite the strong recovery, MongoDB suffered further losses in April when it released its most recent earnings report.
Even though revenue and profits beat expectations, investors were spooked by a more pressing revelation. The company’s management announced a significant reduction in its full-year guidance, fearing that growth in the sector is slowing down.
One reason could be a reversal in US rate cut expectations. The Federal Reserve initially set a target of reducing inflation to 2% by mid-year. But rather than falling, it has risen to 3.4%. So businesses are understandably tightening their belts, particularly when it comes to investing in new and expensive technology.
An opportunity?
MongoDB’s leadership is likely attempting to manage investor expectations by pre-empting further economic shocks this year. On the plus side, if inflation drops more quickly than expected, the company comes out looking even better for its efforts. It’s still unclear when (or if) interest rates will be cut this year. But if they are, the renewed fight for AI superiority could send a flood of fresh investment in Mongo’s direction.
As such, the current share price looks like an attractive entry point to consider getting in while it’s cheap. It’s an investment that carries a fair bit of risk, no doubt. But when looking at the long-term potential, I think it’s a small risk that could result in a big reward.
This post was originally published on Motley Fool
