Where Will Domo Stock Be in 1 Year?

Domo's (DOMO -1.75%) stock price hit an all-time high of $97.70 in August 2021, representing a near-five-bagger gain from its IPO (initial public offering) price of $21 in 2018. But today, the cloud-based data visualization software company's stock trades at about $20. 

Persistent concerns about its slowing growth, lack of profits, and high valuation made it a tough stock to hold as rising interest rates drove investors toward more conservative investments. But could Domo be worth buying again as it dips below its IPO price? Let's see where this volatile stock might be headed over the next 12 months.

Image source: Getty Images.

How fast has Domo been growing?

Domo's cloud-based platform enables a company's leaders to oversee and manage their entire businesses through a single mobile app. Its platform bundles together data visualization services, data management and analytics tools, collaboration features for employees, and its own integrated app store.

Domo is still expanding, but its year-over-year growth in billings and revenue has cooled off over the past three quarters. It attributed that slowdown to the impact of macroeconomic headwinds on its deals with large enterprise customers, which partly offset its stable growth among smaller corporate customers.

Data source: Domo. YOY = Year over year.

It expects that slowdown to continue in the second half of the year, with its revenues rising 17% to 18% year over year in the third quarter and 18% to 20% for the full year. That would represent its slowest annual revenue growth since its IPO.

However, Domo's current remaining performance obligations, or the revenue it expects to generate from its existing contracts over the next 12 months, still rose 23% year over year to $225 million. Therefore, the company still has a clear path toward generating high double-digit sales growth over the next four quarters.

Its margins are still expanding

Domo's top line growth is cooling off, but it's also generating more of its revenues from its higher-margin subscriptions. The gross margin for its subscription services also hit a record high of 84% in the second quarter.

Data source: Domo.

It attributes that ongoing expansion to its lower customer acquisition costs. Its operating margins remain negative by both GAAP (generally accepted accounting principles) and non-GAAP measures, but its non-GAAP operating margin still increased by three percentage points year over year in the second quarter as it downsized its enterprise sales teams.

During the conference call, chief strategy officer John Mellor noted that while its reduced enterprise sales capacity could throttle its near-term revenue growth, it would also put the company in a "very good position to march toward non-GAAP positive operating margin" and improved cash flow growth.

For the third quarter, Domo expects to narrow its non-GAAP net loss from $0.32 per share a year ago to $0.23-$0.27. It also expects to narrow its net loss from $1.30 per share in fiscal 2022 to $0.88-$0.96 in fiscal 2023. That progress is encouraging, but investors shouldn't expect Domo to come anywhere close to breaking even within the next 12 months.

Domo's valuations finally look attractive

Domo's slowing growth and lack of profits could make it unappealing investment in this tough market for tech stocks. However, it also looks incredibly cheap at just two times this year's sales.

Salesforce, which owns Domo's rival Tableau, is growing at a slower rate than Domo but still trades at five times this year's sales estimate. ServiceNow, the cloud-based digital workflow services provider that is growing slightly faster than Domo, trades at 12 times this year's sales estimate. Therefore, any positive macro developments -- which would presumably alleviate the pressure on its enterprise business -- could cause the stock to rally.

Domo's insiders have also bought more than three times as many shares as they sold over the past three months and purchased nearly three times as many shares as they sold over the past 12 months. That warm insider sentiment further reinforces the notion that its stock is undervalued.

Based on these facts, I believe Domo's stock will likely stabilize near its IPO price and gradually rise over the next 12 months. It will likely be a rocky ride, but investors who ride out the near-term volatility could be well rewarded.