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Market Like Mongo

December 12, 2022

Market Like Mongo

Database platform provider MongoDB (MDB) reported earnings after the close on Tuesday that topped estimates on all accounts. Adjusted earnings were up sharply from a year earlier, and easily topped the analyst estimate. Revenue was up nearly 50% from a year ago and beat expectations by nearly 10%. And for good measure, the company raised guidance for Q4 and fiscal 2023, with both metrics beating the consensus analyst forecast.

Despite hitting the trifecta on beating estimates, analysts were mixed in their response. The stock received one upgrade, but target price changes were both up and down. But that’s been the pattern with most stocks, as analysts are finally lowering their ridiculously high targets after stocks have slumped this year. Even so, MDB’s average target price is $273, 42% above Friday’s close. Analysts have some work to do before the target price can be taken seriously.

On the chart, MDB dropped 76% from its December 2021 high before rallying 42% in just the past month. Most of the strength came after earnings, when the stock soared as much as 29% the day after earnings. That was MDB’s largest post-earnings maximum move in its brief five-year history. The price spike also pulled the stock above its now-rising 20-day moving average and flattening 50-day moving average.

This trade is based on MDB continuing its rally on the heels of a strong earnings report, or at least staying above the 50-day moving average (blue line). Note that the short put strike of our spread (red line) is below the 50-day. If you agree that MDB will remain atop the 50-day, consider the following trade that relies on the stock staying above $170 through expiration in six weeks:

Buy to Open the MDB 20 Jan 165 put (MDB230120P165)
Sell to Open the MDB 20 Jan 170 put (MDB230120P170) for a credit of $1.40 (selling a vertical)

This credit is $0.05 less than the mid-point price of the spread at Friday’s $191.75 close. Unless MDB surges quickly, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $138.70. This trade reduces your buying power by $500, making your net investment $361.30 per spread ($500 – $138.70). If MDB closes above $170 on Jan. 20, both options will expire worthless and your return on the spread would be 38% ($138.70/$361.30). 

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