Is Domo's Post-Earnings Surge Sustainable?

Domo's (DOMO 0.40%) stock recently soared after the cloud analytics software provider's third-quarter numbers topped analysts' expectations. Its revenue rose 22% annually to $44.8 million, beating estimates by nearly $3 million. Its total billings grew 15% to $44.4 million.

Domo's non-GAAP net loss narrowed from $27.9 million to $23.6 million, or $0.85 per share, which also beat expectations by $0.16. On a GAAP basis, its net loss narrowed from $32.5 million to $29.1 million, or $1.05 per share.

Domo's numbers weren't jaw-dropping, but they indicate that it's still growing in a competitive field. Let's dig deeper into its report to see if its post-earnings surge is sustainable.

Image source: Getty Images.

The key numbers

Domo's investors likely breathed a sigh of relief for two main reasons. First, the company's billings growth accelerated after a significant deceleration in the second quarter, which it blamed on a pursuit of larger enterprise customers instead of smaller businesses. Second, its revenue stabilized with its second straight quarter of 22% growth.

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

Domo expects its fourth-quarter revenue to rise 14%-17% annually, beating estimates for 11% growth. However, it expects its billings to stay nearly flat.

That forecast points at a slowdown in the fourth quarter, but investors should recall that it sandbagged its third-quarter guidance with a forecast for just 13%-15% growth in revenue and a 6% decline in billings. It's unclear if Domo is tempering expectations or actually struggling against the competition, but investors should take its forecast with a grain of salt.

Meanwhile, Domo's subscription revenue continued to grow as a percentage of its total revenue, and its subscription margin expanded both sequentially and annually.

Source: Domo quarterly reports.

Those numbers indicate that Domo's pursuit of larger partners -- like Amazon Web Services, Verizon, and Coca-Cola bottler Swire Coca-Cola -- is paying off. The company is also locking in its existing customers with a gross retention rate of 90%.

Image source: Getty Images.

Domo's dependence on higher-margin, recurring revenue gives it more room to cut its operating expenses, which rose just 5% annually (on a non-GAAP basis) during the quarter. But Domo won't achieve profitability anytime soon, and it's still burning through a lot of cash -- it ended the quarter with just $93.5 million in cash and equivalents (plus $22.4 million in short-term investments), down from $177 million at the beginning of the year.

But during the conference call with analysts, CEO Josh James declared that Domo was making "meaningful progress on reducing our cash burn," and that he believed that its efforts were "more than sufficient" to "achieve a cash flow positive position" in the future.

A low valuation but an uncertain future

Domo only trades slightly above its IPO price after its post-earnings pop, and the stock trades at just three times next year's sales, which is an unusually low valuation for a growing cloud company. However, Domo is trading at a discount to many of its peers because it faces a growing list of competitors.

Domo's core platform is a cloud-based analytics dashboard that can be accessed via a mobile app. It's expanding that ecosystem with an app store, an AI platform for crunching data, and collaboration and marketing tools for employees.

However, two recent acquisitions cast a dark cloud over Domo's future: Salesforce's (CRM 1.05%) takeover of Tableau, and the acquisition of Looker by Alphabet's (GOOG 1.25%) (GOOGL 1.27%) Google.

Tableau and Looker both compete with Domo, and their integration into Salesforce and Google's enterprise ecosystems could reduce Domo's pricing power and pull away its customers. In response, Domo would need to cut prices and boost its spending again, which would exacerbate its losses and cash burn issues.

Domo expects its revenue to rise 21%-22% for the full year, but analysts -- many of whom are concerned about macro headwinds and competition from bigger rivals -- only expect about 10% growth next year. That's why investors aren't as bullish on Domo as they are on other cloud stocks like Twilio, which has surged nearly seven-fold since its IPO and still trades at over nine times next year's sales.

Stick with more promising cloud stocks instead

Domo isn't doomed, but it's a company with lackluster growth and a narrow moat in an industry that favors accelerating growth with wide moats. Therefore, investors should stick with more promising cloud stocks instead of unproven underdogs like Domo.