Is Domo Stock a Buy Now?

Domo (DOMO 4.15%) posted its fourth-quarter earnings report on March 1. The cloud-based data visualization company's revenue rose 23% year over year to $70 million, beating analysts' estimates by $2.9 million. But its adjusted net loss widened from $9.8 million to $13.6 million, or $0.41 per share, which missed analysts' expectations by a penny.

Domo's stock dipped after the mixed report, and it remains more than 50% below its all-time high of $98.35, which it hit just last August. Should investors consider buying some shares of Domo after that steep decline?

Image source: Getty Images.

Rock-solid growth rates

Domo's cloud-based platform enables business leaders to oversee and manage their entire companies through a single mobile app. It bundles together data visualization services, data management and analytics services, collaboration tools for employees, and an integrated app store.

Domo is a small-cap company with a market cap of $1.4 billion, but its growth rates are remarkably consistent. Its revenue and billings rose 23% and 27%, respectively, in fiscal 2022 (which ended this January), and both metrics remained consistently above 20% throughout the full year.

Data source: Domo. YOY = Year over year.

Domo's 30% billings growth in Q4 was also its highest billings growth rate in 14 quarters. Its current remaining performance obligations (RPO), which gauge its forward growth, also increased 24% -- which suggests it can maintain more than 20% growth for the foreseeable future.

In the first quarter of 2022, Domo expects its revenue to rise 22% to 24% year over year. It also expects its revenue to grow 22% to 24% for the full year.

What are the main catalysts?

During the conference call, CFO Bruce Felt attributed Domo's consistent growth to its "new customer additions, expansion into existing customers, and an over 90% gross retention rate" -- compared to less than 90% a year ago. Its net retention rate remained above 100%, and it signed 62% of its customers to multi-year contracts on a dollar-weighted basis at the end of Q4, compared to 60% a year earlier.

In addition, Felt said the company benefited from its "better market positioning and awareness, higher yields on marketing spend, and improved partner contribution." Those stable returns can also be reflected in its subscription gross margin, which grew from 80% in fiscal 2021 to 82% in fiscal 2022 on a generally accepted accounting principles (GAAP) basis. That metric has also stayed comfortably above 80% over the past four quarters.

Data source: Domo. GAAP basis.

But can Domo ever turn a profit?

Domo's top-line growth looks stable, its gross margins are improving, and the stock looks cheap at just four times this year's sales.

By comparison, Salesforce (CRM -0.57%), which owns Domo's competitor Tableau, is expected to generate 21% sales growth this year but trades at six times that estimate. Splunk (SPLK), which also provides data visualization tools, also trades at about six times this year's sales but is expected to grow its revenue by just 18% this year.

However, investors seem to be concerned about Domo's widening losses. On a GAAP basis, its net loss widened from $84.6 million in fiscal 2021 to $102.1 million in fiscal 2022. On a non-GAAP basis, its net loss narrowed slightly from $50.8 million to $41.5 million, but it expects its non-GAAP net loss to widen again in fiscal 2023 as it ramps up its investments.

All that red ink is worrisome since Domo's total cash and equivalents declined 8% year over year to $83.6 million at the end of fiscal 2022. Its total liabilities also jumped 24% to $370.6 million, and those liabilities still eclipse its total assets of $244.6 million -- which gives it a negative book value. That's not the case with Salesforce or Splunk.

Is it the right time to buy Domo?

Investors might be willing to overlook Domo's ugly balance sheet in a stable market with low interest rates. But that's not the case anymore -- rising interest rates, Russia's invasion of Ukraine, and other macro challenges are causing investors to retreat from unprofitable growth-oriented companies.

Domo's low price-to-sales ratio might limit its downside potential, but it won't rally until the market climate changes. Investors should avoid Domo until the situation improves and stick with companies with better balance sheets.