Docebo (DCBO -0.83%) is the latest artificial intelligence stock to catch my eye. The company is bringing a different strategy to the enterprise learning management system (LMS) space by focusing on "social learning" -- a method that shies away from the traditional content delivery system and focuses on learning on the job and communal training. This can take place in many forms, whether it's through sharing ideas, workgroups, or modeling. In fact, nearly 70% of workplace learning is through informal, social learning, according to the company.
As an artificial intelligence company, Docebo has created an LMS based on social learning that offers modules and short training sessions designed to pop up on the job rather than having employees sit through hours of videos. While this business sounds great in theory, I have doubts as to whether the company will be able to succeed over the next five years. This is why I am staying away from the stock today and, if I owned shares, I would be dumping them.
Is it a "want to have" product?
I'm not sure whether this business is a "want to have" product or a "need to have" product. In other words, I question how hard businesses will search for tools that specifically focus on social learning rather than simply obtaining a traditional LMS product. For instance, a platform like DigitalOcean (DOCN 0.06%) might be a "need to have" product for its customers because it delivers assets (a strong community, simplicity, and transparency) that its customers find extremely important. Therefore, its customers will go out of their way to work with DigitalOcean rather than Amazon Web Services.
Docebo has spent over 50% of its gross profit on sales and marketing so far in 2021. This shows me that Docebo has to spend an exorbitant amount of its profit to convince customers that its products are necessities.
Another way of thinking about this would be using the "Snap Test." This is a hypothetical scenario that asks: If the company disappeared, would society truly miss it? One company that passes this test could be Zoom Video Communications (ZM -0.04%) because it would be hard to effectively do business without Zoom in our hybrid work environment. If Docebo disappeared, I question how many businesses would be missing it.
The company's Net Promoter Score (NPS) gives me an indication of this. NPS rates customer happiness from -100 to 100, with anything above 50 being considered good. Docebo's NPS is 31, meaning that 27% of customers surveyed gave it a negative score, which tells me that its customers might not be very excited about the product.
Additionally, I wonder how stable Docebo's business would be in an economic downturn. If customers had to choose between Docebo or Zoom during a recession, I don't think Docebo's services are essential enough. While Docebo might be a product that its customers would like to have, I think it fails to be a core software in any of its customers' daily operations.
Poor customer relationship expansion
The company has also done a poor job expanding its customer relationships. This might be a side effect from the factors above, but the company has failed to convince its customers to spend more money on its platform. Docebo's net retention rate is 108%, meaning that customers spending $100 one year ago are spending just $108 today. This pales in comparison to other software companies like Datadog -- an observability platform that allows companies to monitor the performance of their software -- which has had a net retention rate of over 130% for 17 straight quarters.
This low retention rate is also indicative of the switching costs Docebo's products have. The company says that its average contract value (ACV) increased 23% year over year in Q3. If the ACV increased by that much yet its net retention only indicates 8% more spending from existing customers, that could mean the company has high customer churn. While the company does not break out how much customer churn it has, this dichotomy between these two figures could put it in the double-digit range.
When I have worries like these, I tend to be much more concerned with the company's valuation. If a company is looking strong in terms of its finances and customer retention, I am OK with paying a high valuation. But when there are potential cracks in the business foundation, I won't pay any price. Docebo trades at 22 times sales, which is a very expensive valuation, especially for a company with these flaws. Other highly regarded AI stocks like UiPath (PATH -1.99%) trade for similar valuations, but the problems that Docebo faces are more existential than UiPath's.
What the business is doing is definitely disruptive, but my concerns about the company's performance mixed with a high valuation are enough to keep me away from the stock today and sell if I owned shares. Docebo seems to have run out of steam after it has attracted a few loyal customers, but because it isn't a necessary product, I see future struggles continuing to grow. This is why I'm keeping Docebo away from my portfolio.