Salesforce and MongoDB offer distinct avenues for investing in the expanding cloud sector. Salesforce stands as the largest global provider of cloud-based customer relationship management (CRM) services, extending its offerings to include marketing, e-commerce, analytics, and enterprise collaboration. On the other hand, MongoDB aids companies in managing their unstructured data through its database solutions.
In the last five years, Salesforce’s stock has appreciated by approximately 60%, whereas MongoDB’s stock has surged over 90%. Let’s delve into why the smaller database company has outperformed the CRM leader and whether this trend is likely to persist.
Salesforce’s Shift Towards Profitability
Between fiscal 2018 and fiscal 2023, which concluded in January 2023, Salesforce’s revenue experienced a compound annual growth rate (CAGR) of 24%, while its adjusted earnings per share (EPS) increased at a CAGR of 31%. This growth was attributable not only to organic expansion but also to significant acquisitions such as Mulesoft, Tableau, and Slack. However, as growth decelerated in the latter half of fiscal 2023, Salesforce faced pressure from several activist investors.
In response, Salesforce implemented cost-cutting measures, including substantial layoffs, halted large acquisitions, authorized a significant share buyback, and introduced its first dividend. In fiscal 2024, the company’s revenue increased by 11%, while its adjusted operating margin widened by 800 basis points to 30.5%, and its adjusted EPS soared by 57%. Since the onset of fiscal 2023, Salesforce has repurchased $18.1 billion in shares out of its $30 billion authorization.
Looking ahead to fiscal 2025, Salesforce anticipates revenue growth of only 8%-9%, an adjusted operating margin increase to 32.5%, and a 22%-23% rise in adjusted EPS. This slowdown is largely attributed to macroeconomic challenges and fierce competition from other cloud giants like Microsoft and Adobe. Salesforce is now more focused on enhancing profitability rather than pursuing additional acquisitions.
Salesforce’s emphasis on profit growth over revenue expansion signals its maturation as a business. Although it has introduced more generative AI tools to analyze data and automate tasks within its ecosystem, these services have yet to significantly impact sales. The stock appears reasonably priced at 26 times forward earnings, but its modest forward yield of 0.6% may not appeal to income-focused investors in the current high-interest-rate environment.
MongoDB Faces a Potential Slowdown
From fiscal 2018 to fiscal 2023, MongoDB’s revenue climbed at a CAGR of 51%, becoming profitable on an adjusted basis in fiscal 2023. The company’s rapid growth was driven by its non-relational database, which offers greater flexibility and customization compared to traditional relational databases reliant on rigid tables and charts. Its cloud-based Atlas service integrates seamlessly with various cloud infrastructure platforms like Amazon Web Services (AWS) and Microsoft Azure, making it an appealing choice for businesses utilizing multiple cloud services.
In fiscal 2024, MongoDB’s revenue increased by 31%, its adjusted operating margin more than tripled to 16.1%, and its adjusted EPS surged by 311%. However, for fiscal 2025, it projects revenue growth of only 14%-15%, a decline in its adjusted operating margin to around 10%, and a 26%-30% drop in adjusted EPS.
The company attributes this slowdown to macroeconomic challenges, reduced upfront commitments from new customers, challenging year-over-year comparisons with large multiyear deals from fiscal 2024, and slower growth in its non-Atlas services. Additionally, the expansion of its sales teams is expected to pressure margins as growth moderates.
The combination of decelerating growth and declining margins is concerning, yet MongoDB’s stock remains costly at 130 times forward earnings estimates. Investors may be anticipating a resurgence in growth as businesses store more data on its platform to support new AI services, but it’s uncertain whether such high expectations are justified.
The Preferred Investment: Salesforce
While neither stock may be a must-buy at the moment, if compelled to choose between the two, Salesforce emerges as the more attractive option. It is larger, more diversified, boasts higher operating margins, and trades at a more reasonable valuation. Although MongoDB may continue to grow, it needs to achieve stable sales growth accompanied by expanding margins before it becomes a compelling investment opportunity.
