Please ensure Javascript is enabled for purposes of website accessibility

Is Domo Stock a Buy?

By Leo Sun – Sep 1, 2021 at 8:15AM

Key Points

  • Domo’s second-quarter earnings beat Wall Street’s expectations.
  • Its growth in billings and subscription revenue remains stable.
  • The stock’s valuation could limit its near-term upside potential.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The cloud software company's fundamentals are still improving.

Domo's (DOMO 2.56%) stock dipped after the company posted its second-quarter earnings report on Aug. 26. The cloud-based software company's revenue rose 23% year-over-year to $62.8 million, beating Wall Street's consensus estimates by $2 million.

Its non-GAAP net loss narrowed from $10.7 million to $9.6 million, or $0.30 per share, which beat estimates by $0.06 per share. On a GAAP basis, Domo's net loss widened from $17.9 million to $22.2 million.

Domo expects its revenue to rise 18%-20% year-over-year in the third quarter, and 20%-22% for the full year. It expects to remain unprofitable, albeit with narrower year-over-year non-GAAP losses, for both periods. All those estimates either matched or surpassed Wall Street's expectations at the time.

A smartphone user holds a cardboard cutout of a cloud.

Image source: Getty Images.

However, the market's initial reaction to Domo's report suggests investors had expected a bigger beat with rosier guidance. But could Domo's post-earnings dip actually be a good buying opportunity?

What does Domo do?

Domo's cloud-based platform lets CEOs manage their entire companies from their phones through a suite of real-time data visualization and management tools. Its ecosystem includes an integrated app store, an AI platform for process data, and various collaboration and marketing tools for employees.

Domo competes against larger data visualization platforms like Salesforce's (CRM -1.66%) Tableau and Alphabet's Looker for Google Cloud, as well as enterprise collaboration platforms like Microsoft Teams.

But Domo continues to grow in the shadow of those larger competitors, and it's gradually integrating its services into other data-oriented platforms like Snowflake's Snowpark and Amazon's Redshift.  

How fast is Domo growing?

When Domo went public in mid-2018, I wasn't impressed. Its revenue growth was robust and its valuation was low, but it faced too many competitors and lacked a clear path toward profitability.

But if we track Domo's revenue and billings over the past three and half years, we'll see that the competition hasn't throttled its growth at all.

Period

FY 2019

FY 2020

FY 2021

Q1 2022

Q2 2022

Revenue
(YOY Growth)

31%

22%

21%

24%

23%

Billings
(YOY Growth)

28%

14%

23%

25%

26%

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

Meanwhile, Domo generated more of its revenue from subscriptions, and the segment's gross margins expanded as it gained more customers and carefully managed its data center costs.

Period

FY 2019

FY 2020

FY 2021

Q1 2022

Q2 2022

Subscriptions as a Percentage of Total Revenue

82%

85%

87%

87%

87%

Subscription Gross Margin (GAAP)

72%

76%

80%

83%

82%

Source: Domo.

The growth of Domo's sticky subscription business enabled it to maintain a gross retention rate of more than 90% and a net retention rate of over 100% in the second quarter. Domo didn't disclose the exact numbers but noted that both metrics improved "slightly" from the first quarter.

Domo also locked more customers into longer contracts. On a dollar-weighted basis, 60% of its customers had signed multi-year contracts by the end of the second quarter, up from 58% a year ago. Its remaining performance obligations, which include its future contractual revenue, rose 24% year-over-year.

But is Domo's stock still cheap relative to its growth?

Domo's stock has risen more than 130% over the past 12 months and currently trades at eleven times its revenue forecast for fiscal 2022. That price-to-sales ratio might initially seem reasonable, but it's actually a bit high relative to its comparable industry peers.

For example, Salesforce expects its revenue to rise 23%-24% this year and trades at less than ten times that estimate. Salesforce also generated more than 100 times as much revenue as Domo last year, its business is much better diversified, and it's firmly profitable.

Some investors might argue that as a smaller company, Domo has more room to grow than Salesforce. That might be true, but Domo would still need to grow at a much faster rate to support that argument -- and its higher price-to-sales ratio.

Is Domo's stock worth buying?

Domo's core business is strong and its fundamentals are improving. However, its growth isn't impressive enough to support its valuation, and its upside potential could be limited as investors pivot toward more balanced cloud software companies like Salesforce. Therefore, I'm not in a hurry to buy Domo. It's not a bad stock at all, but there are plenty of better cloud software stocks to choose from.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and Salesforce.com. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Microsoft, Salesforce.com, and Snowflake Inc. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Stocks Mentioned

Domo, Inc. Stock Quote
Domo, Inc.
DOMO
$15.22 (2.56%) $0.38
Salesforce Stock Quote
Salesforce
CRM
$144.56 (-1.66%) $-2.44
Microsoft Stock Quote
Microsoft
MSFT
$255.02 (0.13%) $0.33
Alphabet Stock Quote
Alphabet
GOOGL
$100.44 (-0.55%) $0.55
Amazon.com Stock Quote
Amazon.com
AMZN
$94.13 (-1.44%) $-1.37
Alphabet Stock Quote
Alphabet
GOOG
$100.83 (-0.44%) $0.45
Snowflake Stock Quote
Snowflake
SNOW
$149.74 (-2.79%) $-4.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.