Bulls vs. Bears: Who's Right About Domo's Future?

Domo (DOMO -0.93%) has taken investors on a roller-coaster ride since its IPO last June. The cloud analytics software provider went public at $21 per share, and its stock has bounced between the low teens and mid-$40s as the bulls and bears have battled it out.

Domo remains a battleground stock today. The bulls argue that its platform is disruptive, its revenue growth is robust, its margins are improving, and its stock is cheap relative to its peers. The bears argue that its revenue growth is decelerating, it's vulnerable to bigger competitors, and it remains deeply unprofitable. Let's examine both arguments to see where this stock is headed.

Image source: Getty Images.

What the bulls say

Domo's cloud-based OS lets executives manage their companies with the help of phone-based analytics and data management tools. Employees can also access the analytics data to make business decisions.

Domo's expanding ecosystem includes an app store, an AI platform that crunches data and answers questions, a collaboration suite for employees, a data warehouse, and media tools for marketing campaigns. It serves more than 1,500 organizations worldwide, including Uber, eBay, and GlaxoSmithKline.

Domo's number of large enterprise customers, which generate more than $1 billion in annual sales, grew 19% annually to 458 customers last quarter. Revenue from those customers rose 33% and accounted for about half of Domo's sales. That consistent growth has supported Domo's billings and revenue growth in the four quarters since its IPO:

YOY = Year-over-year. Source: Domo quarterly reports.

Domo is also generating more of its revenues from subscriptions, which lock in customers, and the gross margin of those subscriptions is gradually expanding:

Source: Domo quarterly reports.

Domo also reduced its operating expenses (4% annually on a GAAP basis and 15% on a non-GAAP basis) during the quarter to expand its operating margins. As a result, its GAAP operating loss narrowed from $43 million to $33 million, and its non-GAAP operating loss narrowed from $44 million to $27 million.

Domo expects its revenue to rise 21% to 22% this year, and the stock looks cheap at just five times that forecast. By comparison, Salesforce (CRM -0.18%) recently agreed to buy Domo's larger rival Tableau (DATA) at roughly 11 times this year's sales. Tableau's revenue is expected to rise 39% this year and 19% next year.

Image source: Getty Images.

What the bears say

Domo's past growth looks solid, but its future growth is less certain. Salesforce's integration of Tableau's analytics tools into its market-leading CRM (customer relationship management) platform and marketing tools could lure customers away from Domo.

Alphabet's (GOOG 0.74%) (GOOGL 0.55%) Google also recently acquired Looker, a similar business analytics platform that it plans to integrate into Google Cloud. Domo, which doesn't expect to achieve profitability anytime soon, could struggle to compete against these bigger rivals while keeping its costs under control.

Domo is also burning a lot of cash. Its cash and equivalents fell 49% sequentially to $91 million during the quarter. Its stock-based compensation expenses also rose 262% annually and accounted for nearly 19% of its sales, compared to less than 7% a year earlier.

Domo insists that it can eventually generate positive cash flow without any secondary offerings, but that could be a tough promise to keep. Its main strategy is to cut operating expenses as it locks more customers into subscriptions, but cutting costs could leave it too exposed to Salesforce, Google, and other competitors.

The bottom line

Domo is still a promising cloud stock that trades at a reasonable valuation, but the stakes have risen significantly since I praised the stock in March. Salesforce's and Google's acquisitions are changing the competitive landscape, and the fact that neither company bought Domo (despite having a much lower market value than Tableau and Looker) raises questions about its long-term potential. I think Domo is still a decent speculative play, but I'm not as bullish on the stock as I was before.